Emre Yumlu 
The Bank of Japan (BOJ) has announced its latest interest rate decision, opting to keep policy settings unchanged. While the decision itself met market expectations, the accompanying economic projections and official commentary suggest that the central bank is gradually shifting toward a more hawkish stance. This has fueled speculation that the next rate hike could arrive earlier than markets had previously anticipated.
Policy Rate Remains at Multi-Decade High
Following a two-day policy meeting, the BOJ confirmed that it would maintain its benchmark interest rate at 0.75%. The move came after the bank raised rates in December, and economists had largely expected policymakers to pause and assess the impact of that increase.
At current levels, borrowing costs in Japan stand at their highest point in roughly three decades. The central bank emphasized that it is carefully monitoring how the previous hike is filtering through the economy, while also keeping an eye on political developments that could influence fiscal policy.
In particular, uncertainty surrounding Prime Minister Sanae Takaichi’s decision to call a snap election next month has added another layer of complexity to the policy outlook.
Hawkish Voices Growing Within the Board
Although the headline rate decision was unanimous, internal dynamics at the BOJ suggest a gradual shift in tone. Board member Hajime Takata once again proposed a rate hike, marking the second consecutive meeting in which he has done so.
While his proposal did not gain broader support, it underscores a growing hawkish undercurrent within the central bank, signaling that the debate over further tightening is becoming more active.
Growth and Inflation Outlook Revised Higher
The BOJ’s quarterly outlook report provided clearer insight into this evolving stance. The central bank upgraded its economic growth forecasts for fiscal years 2025 and 2026, maintaining its assessment that Japan’s economy remains on track for a moderate recovery.
More notably, the BOJ revised its core inflation forecast for fiscal 2026 upward to 1.9%, from 1.8% previously. Officials noted that risks surrounding economic activity and price developments are now broadly balanced, a subtle but meaningful shift from earlier caution.
Wage-Price Cycle Seen as Intact
In its report, the BOJ reaffirmed its view that a positive cycle between wages and prices is gradually strengthening. According to policymakers, steady wage growth alongside moderate price increases should support a continued rise in underlying inflation over time.
The central bank also highlighted the increasing influence of currency movements on domestic prices. A weaker yen, it warned, could amplify inflationary pressures by shaping public expectations about future price trends.
Markets Focus on Governor Ueda’s Guidance
Investor attention has now turned to BOJ Governor Kazuo Ueda’s post-meeting press conference. Markets are searching for clues on the timing of the next rate hike, particularly in light of recent volatility linked to political uncertainty and rising government bond yields.
HSBC’s Chief Asia Economist Fred Neumann noted that the revised outlook reflects a clear shift toward a more hawkish narrative. According to Neumann, upward revisions to both growth and inflation expectations keep upcoming policy meetings firmly “live” for further rate increases.
Rising Bond Yields Complicate Policy Balance
At the same time, Japan’s bond market has come under pressure. Prime Minister Takaichi’s plans to expand fiscal support—alongside proposals to suspend the 8% sales tax on food—have raised concerns about increased government borrowing, pushing yields higher.
This presents a delicate challenge for the BOJ. On one hand, the bank aims to maintain hawkish communication to prevent excessive yen weakness. On the other, it must avoid triggering a sharp rise in bond yields that could undermine economic stability.
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