The Bank of Japan (BOJ) kept its benchmark interest rate unchanged at 1% on July 31, 2026, in a widely anticipated decision that followed June’s hike to a 31-year high. The policy board voted 8 to 1 to hold steady, with board member Hajime Takata dissenting for the second consecutive meeting, pushing for a hike to 1.25%. Despite the hold, the BOJ adopted a hawkish tone in its outlook report, warning that core inflation is likely to accelerate above its 2% target starting in the second half of the fiscal year, which runs from September through March.
Japan’s core inflation for July came in at 1.6%, still below the target, but the BOJ trimmed its fiscal 2026 core inflation forecast to 2.5% from 2.8% projected in April. Officials attributed the expected overshoot to import costs tied to a weak yen, resilient corporate pricing power, and lingering effects of the Middle East-driven energy shock earlier in the year. Governor Kazuo Ueda acknowledged that many board members’ inflation forecasts remain high, with risks tilted to the upside, keeping attention on the next policy meeting.
In a separate move, the BOJ reportedly intervened directly in currency markets hours before the rate decision, conducting yen-buying, dollar-selling operations in New York—the first such intervention in three months. The yen had slid toward a 40-year low near 163 per dollar before rallying toward 157.96, later settling around 159.90. The intervention underscored the mounting pressure from the wide gap between US and Japanese rates, elevated fuel costs, and bearish positioning against the yen, with net short yen positions near a two-year high. The dollar index remained under pressure as traders reassessed global rate expectations.
Economists and analysts now expect the BOJ could raise rates again before year-end, with September or October under close watch. The hawkish signal, combined with the yen volatility, suggests that the BOJ is navigating a delicate path between government reluctance for tightening and bond markets already pricing in further moves, as the 10-year Japanese government bond yield eased to 2.8%.
