Updates with BOJ economic outlook, market reaction
Investing.com-- The Bank of Japan left interest rates unchanged on Thursday, meeting market expectations for a hold as the central bank grapples with increased economic uncertainty and a looser fiscal outlook.
The central bank reiterated its messaging that it will continue to hike interest rates and tighten monetary policy if the economy and inflation move in line with its forecasts.
The BOJ slightly hiked its outlook for gross domestic product growth and consumer inflation in fiscal 2025, but cut its growth forecast for 2026.
The BOJ left its benchmark rate at 0.5%, having last hiked the rate in January this year. Thursday’s decision was in a 7-2 majority vote, with board members Takata Hajime and Tamura Naoki both keeping up their calls for a rate hike.
The two argued that increased inflation risks called for a policy rate that was a “little closer” to the neutral rate, and that the BOJ raise its benchmark by 25 basis points to 0.75%.
The BOJ hiked its 2025 GDP forecast to a range of 0.6% to 0.8% from 0.5% to 0.7%, stating that Japanese economic growth was likely to be "modest" amid overseas headwinds and declining domestic corporate profits.
But accommodative financial conditions in the country are expected to provide support.
The BOJ sees economic growth and inflation stagnating in the medium term, but sees both picking up in the long run on improved local productivity and fewer overseas trade headwinds.
The central bank forecast consumer price index inflation rising slightly more in 2025-- in a range of 2.7% to 2.9%, compared to its prior outlook of 2.7% to 2.8%.
In fiscal 2026, the BOJ sees GDP at 0.6% to 0.8%, down from its prior forecast of 0.7% to 0.9%. CPI is expected at 1.6% to 2.0%, while core CPI is seen remaining around the BOJ’s 2% annual target.
Thursday’s decision comes after data last week showed an uptick in Japanese consumer inflation, with core inflation remaining well above the BOJ’s 2% annual target. This trend is largely expected to keep the BOJ biased towards more rate hikes in the coming months.
But the BOJ is expected to face political resistance towards more monetary tightening, especially after the election of Liberal Democratic Party leader Sanae Takaichi as prime minister.
Takaichi is regarded as a fiscal dove, and is expected to ramp up government spending and stimulus measures. She is also expected to call for looser monetary conditions to support what she sees as a fragile Japanese economy.
The Japanese yen softened slightly after Thursday’s decision, with the USD/JPY pair rising 0.2%. Japanese stocks trimmed some gains but remained upbeat, with the Nikkei 225 up 0.4% and at a record high
