BoJ maintains its short-term interest rate at 0.75%, as expected; vote split 6-3 to hold (exp. near-unanimous); Nakagawa, Takata and Tamura voted to hike by 25bps to 1.0%
BoJ Outlook Report:
Real GDP:
- Fiscal 2026 median forecast 0.5% (prev. 1.0%)
- Fiscal 2027 median forecast 0.7% (prev. 0.8%)
- Fiscal 2028 median forecast 0.8%
Core CPI
- Fiscal 2026 median forecast 2.8% (prev. 1.9%)
- Fiscal 2027 median forecast 2.3% (prev. 2.0%)
- Fiscal 2028 median forecast 2.0%
Dissenters (voted for 25bps hike)
- BoJ’s Takata: price stability target had been more or less achieved and that risks to prices in Japan were already skewed to the upside due to the second-round effects of price rises stemming from overseas developments.
- BoJ’s Tamura: Considering that, with risks to prices becoming significantly skewed to the upside, the bank should set the policy interest rate as close to the neutral rate as possible.
- BoJ's Nakagawa: Risks to prices skewed to the upside under accommodative financial conditions.
Monetary policy
- Will scrutinise timing, pace of policy adjustment with a close eye on economic and price impact from the Middle East developments.
Economic activity
- Economic growth likely to decelerate in FY26.
- Economic growth rate to rise moderately from fiscal 2027 onwards.
- The economy is expected to continue growing modestly, albeit at a decelerated rate.
Inflation / CPI
- Underlying inflation likely to be at level generally consistent with 2% target in H2'26 and 2027.
- Underlying consumer inflation likely to gradually accelerate and converge towards the level consistent with price target.
- Must scrutinise whether underlying inflation becomes embedded around 2%.
- Projected year-on-year rate of increase in the CPI for fiscal 2026 is significantly higher, reflecting the rise in crude oil prices.
- Inflation expectations likely to continue increasing moderately.
- Medium-, long-term inflation expectations rising gradually.
Wages/labour market
- Wage, prices may face upward pressure more than what output gap suggests.
Risks
- Risks to economic outlook skewed to the downside.
- Risks to inflation skewed to the upside.
- There are various risks to the outlook.
Middle East:
- Rise in crude prices is expected to push down corporate profits and households' real income.
- Middle East developments, if persistent, could keep oil prices elevated, cause huge supply chain disruptions and weigh on corporate activity.
Comsumption:
- Private consumption to be flat more or less.
FX:
- Necessary to pay particular attention to the impact of the future course of the situation in the Middle East on financial and FX markets.
The BoJ's decision to maintain its short-term interest rate at 0.75% was widely anticipated, yet the split vote of 6-3 indicates that some board members are increasingly concerned about inflationary pressures and the need for tighter policy. This dissent, coupled with forecasts of rising inflation and modest economic growth, may prompt markets to reassess expectations for future rate hikes, particularly if inflation becomes more entrenched.
The emphasis on monitoring geopolitical developments, especially in the Middle East, suggests that external factors could significantly influence the BoJ's policy outlook, impacting the JPY and related assets.