Bank of Japan Maintains Rates, Projects Moderate Growth and Stable Inflation

BOJ Holds Rates Amid Upgraded Economic Outlook

The Bank of Japan (BOJ) concluded its Monetary Policy Meeting on January 22 and 23, 2026, opting to keep its key short-term interest rate unchanged at 0.75%. The decision was widely anticipated, though one board member, Hajime Takata, reportedly dissented, advocating for a rate hike to 1.00%. Following the meeting, the central bank released its 'Outlook for Economic Activity and Prices,' which projects continued moderate economic growth and a path towards stable inflation in Japan.

Revised Growth Projections Reflect Stimulus Impact

The BOJ's latest outlook indicates an upward revision to its real Gross Domestic Product (GDP) growth forecasts for the current and upcoming fiscal years. For Fiscal Year 2025, the projection was raised to 0.9% from the previous 0.7%. Similarly, the forecast for Fiscal Year 2026 saw an increase to 1.0% from 0.7%. However, the growth estimate for Fiscal Year 2027 was slightly lowered to 0.8% from 1.0%. These revisions are largely attributed to the positive effects of the government's economic measures and prevailing accommodative financial conditions.

Inflation Trajectory Towards 2% Target

Regarding inflation, the BOJ expects the year-on-year rate of increase in the Consumer Price Index (CPI) excluding fresh food to decelerate to below 2% in the first half of the current fiscal year. This is primarily due to the diminishing impact of rising food prices and government initiatives aimed at addressing price increases. However, the central bank anticipates that underlying CPI inflation will continue its moderate rise, eventually reaching a level generally consistent with its 2% price stability target in the second half of the projection period.

Specific forecasts for core inflation measures also saw adjustments:

• The core consumer inflation outlook for FY 2026 (excluding fresh food) was nudged up to 1.9% from 1.8%.
• Another measure, core inflation excluding fresh food and energy, was raised to 3.0% for the current fiscal year and 2.2% for the next fiscal year.
• Consumer prices excluding volatile fresh food are projected to rise 2.7% in the fiscal year through March 2026, then 1.9% in the following fiscal year, and 2% in FY 2027.

Factors contributing to the inflation outlook include a projected increase in labor shortages and rising medium- to long-term inflation expectations.

Future Policy and Risk Assessment

Governor Kazuo Ueda reiterated the BOJ's stance that it will continue to raise the policy interest rate and adjust the degree of monetary accommodation if economic activity and prices evolve in line with the current outlook. The central bank assessed the risks to both economic activity and prices as generally balanced. The real interest rate in Japan remains at significantly low levels, suggesting potential for further adjustments if conditions warrant. The upcoming snap election on February 8th, initiated by Prime Minister Sanae Takaichi, adds a layer of political context to the economic landscape.