- Decision
- Maintain
- Rate change
- 0 bps
- uncollateralized overnight call rate
- 0.5%
The Policy Board of the Bank of Japan on 19 September voted 7-2 to keep its policy stance unchanged, continuing to “encourage” the uncollateralised overnight call rate at around 0.5 percent and, by unanimous decision, commencing market sales of its exchange-traded fund (ETF) and Japan real estate investment trust (J-REIT) holdings—about JPY330 bn and JPY5 bn a year respectively—while ending the ETF lending facility in line with guidelines that aim to avoid market disruption. The benchmark rate has been steady at 0.5 percent since a 25 bp hike in January 2025. Financial conditions remain accommodative as the economy “has recovered moderately, although some weakness has been seen,” with exports and industrial production flat, business investment edging up and private consumption holding firm despite soft housing investment and subdued consumer sentiment. Core CPI (all items less fresh food) is rising 2.5-3.0 percent y/y, lifted by higher food costs and continued wage pass-through, and inflation expectations are “moderately” higher. The Bank projects growth to slow as global trade frictions and higher U.S. tariffs restrain external demand and corporate profits before picking up again, while underlying inflation is expected to ease in the near term then climb gradually to levels broadly consistent with the 2 percent price stability target in the latter half of the July 2025 outlook horizon. It flags “highly uncertain” trade policy developments, overseas economic momentum, and their spill-over to financial and foreign-exchange markets as key risks requiring close monitoring.
Rate evolution
From June 2025 to April 2026, the Bank of Japan kept the uncollateralized overnight call rate at 0.5 percent until December, then raised it to 0.75 percent and held it there amid a recovery marked by rising business investment and resilient consumption under accommodative financial conditions, while consumer price index (CPI) inflation was lifted by wage pass-through, import-price effects and food prices that the Bank expected to fade, leaving underlying CPI inflation to rise gradually toward the 2 percent target. Uncertainty over trade and other policies abroad, initially described as extreme, had eased by December as confidence grew that wage and price increases would persist and bring underlying inflation into line with target, and in March and April 2026, as CPI inflation eased to around 2 percent, the Bank said it would continue raising the policy rate if the January Outlook path was realized, adding Middle East tensions, crude oil and firms’ wage- and price-setting behavior to key risks as April’s 6-3 vote showed greater concern that price risks were skewing upward.
On June 16, the Bank raised the uncollateralized overnight call rate to around 1.0 percent by a 7-1 majority vote as the economy recovered moderately, the risk of a significant slowdown decreased and financial conditions remained accommodative, while flagging upside risks to underlying CPI inflation from fast crude oil pass-through in business-to-business transactions and rising medium- to long-term inflation expectations. On July 31, it held the rate at around 1.0 percent by an 8-1 vote, noting that CPI inflation was around 1.5 percent due partly to government energy measures but was likely to accelerate clearly above 2 percent from the second half of fiscal 2026 as wage increases fed into selling prices and crude oil, semiconductor prices, global artificial intelligence-related demand and yen depreciation pushed up prices, and saying that, with CPI risks skewed upward, it would continue raising the policy rate while assessing economic activity, prices and financial conditions, while the dissenting member proposed raising the rate to around 1.25 percent.
The Bank decided by a 7-2 vote on September 18 to raise the uncollateralized overnight call rate to around 1.25 percent effective September 24, judging that economic activity and prices were developing generally in line with the baseline scenario as the economy recovered moderately despite the Middle East situation and underlying CPI inflation approached 2 percent. With a high year-on-year rise in the producer price index beginning to spill into consumer prices, medium- to long-term inflation expectations continuing to rise and financial conditions remaining accommodative, the Bank warned that underlying CPI inflation could move above the 2 percent target amid risks from the Middle East situation, expanding artificial intelligence-related demand and foreign exchange rates, and said it would continue raising the policy rate while assessing the likelihood of realizing the baseline scenario and risks to the outlook when determining the timing and pace of adjustment.