Bank of Japan Holds at 1.25% as Inflation Risk Tilts Higher

The Bank of Japan kept its policy rate at 1.25%, but the language around the decision moved in a more hawkish direction. For the first time since adopting its inflation target in 2013, the bank said underlying inflation was generally consistent with its 2% goal.

The vote was 8 to 1. Board member Hajime Takata preferred a rise to 1.5%, arguing that inflation had entered a new phase and policy should move closer to a neutral rate. The dissent does not set policy, but it shows that the debate has shifted from whether inflation can persist to how quickly the bank should continue normalizing.

The BOJ also raised its fiscal 2027 forecast for inflation excluding fresh food to 2.6%, up 0.2 percentage point from July. Its forecast excluding fresh food and energy rose to 2.7%. The bank said risks to prices were tilted upward because companies were becoming more willing to raise wages and prices, while a weaker yen and higher energy and semiconductor costs could add pressure.

A second policy change matters for Japanese equities. The BOJ will increase the book-value pace of ETF sales to about 860 billion yen a year from roughly 330 billion yen, starting in January 2027. It estimates the new pace at about 2.46 trillion yen a year at market value, but retains the option to adjust or suspend sales if markets become unstable.

The hold does not mean the tightening cycle is finished. September core inflation was 2.1%, and the bank's own outlook says underlying inflation should remain near 2%. At the same time, officials expect economic growth to remain moderate, and private economists cited by CNBC warned that consumption remains a weak link.

For investors, the combination is important: Japan is moving further from the ultra-loose policy regime that defined its markets for decades, but the BOJ is still trying to avoid damaging a fragile expansion. Japanese bank margins and the yen may benefit from higher rates, while rate-sensitive equities and government bonds face more pressure. The next decision will depend on whether wage gains keep supporting consumption rather than merely compensating households for higher prices.