Bank of Japan holds at 1.25% but steps up ETF sales and signals more hikes
The Bank of Japan held its overnight call rate at around 1.25% by an 8-1 vote, raised the pace of ETF sales to about 860 billion yen a year, and said it will continue to raise rates.
- The Bank of Japan held the uncollateralized overnight call rate at around 1.25%, by an 8-1 majority vote. m:…8128
- The bank raised the annual pace of ETF sales to approximately 860 billion yen, starting in January 2027. m:…8128
- The bank said it will continue to raise the policy interest rate and adjust the degree of monetary accommodation. m:…3882
- ING forecasts the Bank of Japan will hike rates in December and March. m:…2387
What changed
The Bank of Japan set the guideline for money market operations to encourage the uncollateralized overnight call rate to remain at around 1.25%. The decision to maintain that rate was passed by an 8-1 majority vote. m:…8128
The dissenter was Takata Hajime, who proposed a target of 1.5% for the overnight call rate. He argued that the bank should step up the pace of bringing the policy interest rate closer to the neutral interest rate. m:…8128
While the rate stayed put, the balance sheet moved. The bank decided to increase the annual pace of ETF sales to approximately 860 billion yen, with the new pace implemented in January 2027. m:…8128
The pace of J-REIT sales will be maintained at approximately 5 billion yen per year, and the bank may temporarily adjust or suspend ETF sales in response to changes in financial market conditions. That escape clause matters: the sales plan is a direction, not an unconditional promise. m:…8128
Why the bank thinks it can tighten
In its October outlook, the bank said the year-on-year rate of increase in the consumer price index, for all items less fresh food, is likely to accelerate to a level clearly above 2%. ING's reading of the meeting was blunter, describing the bank as having hit its 2% price target. m:…3882
The bank also pointed to tight labour market conditions, with nominal wages projected to continue increasing steadily, and said firms' wage- and price-setting behaviour is becoming more active. That combination is what makes further rate rises plausible even while growth is slowing. m:…3882 m:…8737
Japan's economy is expected to continue growing moderately, albeit at a decelerated rate, in fiscal 2026, with growth likely to rise moderately from fiscal 2027 onward. The projected real GDP growth rates for fiscal 2026 and 2027 are more or less unchanged from the previous outlook report. m:…3882
ING puts Japanese growth forecasts at around 0.7 to 0.8%, which frames the bank's task as tightening into modest growth rather than a boom. m:…2387
The risks the bank flagged
The bank assesses risks to economic activity as generally balanced, while risks to the price outlook are skewed to the upside. It warned there is a risk that medium- to long-term inflation expectations will rise and underlying inflation will deviate upward above the price stability target. m:…3882
ING lists the upside price risks the bank identified as energy prices, AI demand and the weak yen. It also notes the bank expects strong corporate profits to feed into wages and higher inflation. m:…2387
One policy wildcard is fiscal. The bank estimates that a proposed consumption tax cut could reduce the year-on-year consumer price increase by approximately 1.3 to 1.4 percentage points in fiscal 2027, which would complicate the inflation picture just as rates are meant to rise. m:…3882
The bank assumes Dubai crude oil prices will decline from around 105 dollars per barrel to around 70 dollars per barrel toward the end of the projection period. If energy prices do not fall that way, the upside risk to inflation grows. m:…3882
What happens next
The bank said it will continue to raise the policy interest rate and adjust the degree of monetary accommodation. That sentence is the forward guidance, and it is deliberately open-ended about timing. m:…3882
ING forecasts the bank will hike rates in December and March, and says the bank aims to take policy rates to a neutral range of 1.75 to 2.00%. ING expects the dollar-yen rate to stay in a 155 to 160 range over the coming months, and does not expect it to turn decisively lower until the second quarter of 2027. m:…2387
The decision to increase ETF sales is based on the expansion of total trading value in the stock market, according to the bank. The practical read is that the bank is using the balance sheet to tighten at the margin while it waits for the right moment to move the rate itself. m:…5112
What is still unresolved
- Whether the Bank of Japan hikes in December and March as ING forecasts
- Whether inflation stays above 2% once the proposed consumption tax cut is factored in
- Whether ETF sales proceed at the new pace if market conditions deteriorate
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