The Bank of Japan (BOJ) held its ultra-low interest rates steady on Thursday, underscoring a cautious approach to global economic risks as it monitors the fragile domestic recovery to guide future policy adjustments.
While the BOJ indicated inflation could stay near its 2% target in the coming years, it remains focused on global economic trends in deciding on any further tightening measures.
“The Bank needs to pay due attention to the future course of overseas economies, particularly the U.S. economy, and developments in financial markets,” the BOJ stated in its quarterly outlook report. “It also needs to examine how these factors will affect the outlook for Japan’s economic activity and prices, the risks surrounding them, and the likelihood of realising the outlook.”
As expected, the BOJ maintained the short-term interest rate at 0.25% following its two-day meeting. The board forecasted core consumer inflation at 2.5% for the fiscal year ending in March 2025, with expectations of 1.9% in both fiscal 2025 and 2026.
The central bank also assessed “core-core” inflation, excluding fuel costs, and considered a significant measure of demand-driven price changes. Projections put this measure at 2.0% in fiscal 2024, slightly easing to 1.9% in 2025 before rising to 2.1% in 2026.
Markets will turn their attention to BOJ Governor Kazuo Ueda's post-meeting briefing, set for 5:30 pm AEDT (6:30 am GMT), for insights on potential future rate hikes.
The BOJ previously ended its negative rate policy in March and raised short-term rates to 0.25% in July, viewing this as progress toward the 2% inflation target.
Ueda has consistently stated that rates will rise if the economy aligns with BOJ forecasts but emphasised that there is no urgency to tighten further due to moderate inflation.
Thursday’s data also revealed an uptick in Japan's factory output and retail sales in September, reflecting a moderate economic recovery.
However, recent losses for the ruling coalition in a weekend election could complicate further rate hikes as analysts highlight growing concerns about potential policy gridlock.