Global Market: BOJ keeps rates unchanged, signals readiness for further hikes as yen remains under pressure

The Bank of Japan (BOJ) kept its key interest rate unchanged on Friday, while reaffirming its willingness to raise borrowing costs further if inflation risks intensify, following the government's intervention to support the weak yen, as per a Reuters report.

At the conclusion of its two-day policy meeting, the central bank voted 8-1 to maintain its short-term policy rate at 1%. Board member Hajime Takata dissented, proposing a 25-basis-point increase to 1.25%, highlighting continued debate within the policy board over the pace of monetary tightening, according to the report.

The policy decision came a day after Japanese authorities intervened in currency markets by buying yen and selling dollars to arrest the currency's slide from four-decade lows, a move that underscored concerns over the impact of a weak yen on import costs and inflation.


The BOJ had raised interest rates in June to their highest level in 31 years and is widely expected to continue normalising monetary policy gradually. Most economists surveyed by Reuters expect another rate hike to 1.25% before the end of the year.

In its quarterly outlook report, the BOJ upgraded its economic growth forecast for fiscal 2026, reflecting easing concerns over the impact of the Middle East conflict on Japan's economy. The central bank, however, lowered its near-term inflation projections, citing the effects of government subsidies and lower oil prices compared with earlier assumptions.

Despite the downward revision to inflation forecasts, the BOJ maintained that risks to prices remain skewed to the upside. The central bank also indicated underlying inflation could exceed its 2% target, reinforcing expectations that further policy tightening remains on the table if price pressures strengthen.

The BOJ's meeting followed the U.S. Federal Reserve's policy decision earlier this week, where the Fed left interest rates unchanged despite three policymakers dissenting in favour of a quarter-percentage-point increase.

Market participants are now closely watching Governor Kazuo Ueda's post-policy comments for clues on the timing of the next rate hike, particularly as the yen remains under pressure amid expectations that U.S. interest rates could stay elevated for longer.

The weak yen has become a growing concern for Japanese policymakers, as it raises the cost of imports and adds to inflationary pressures on households and businesses. Analysts believe the BOJ will need to balance its gradual approach to policy normalisation against the risk of further currency depreciation.

At the same time, policymakers face uncertainties including political pressure to avoid overly aggressive tightening and the potential economic impact of a recent 7.1-magnitude earthquake in Kumamoto prefecture, an important manufacturing and semiconductor hub, Reuters reported.

Recent economic data, however, suggest the Japanese economy remains resilient. Factory output rose in June, with manufacturers projecting further gains in the coming months. Separate data also showed core consumer inflation in Tokyo accelerated to 1.7% in July, indicating that price pressures remain broad-based despite lower energy costs, according to Reuters.