Bank of Japan remains on hold in July

BOJ holds again: At its meeting ending on 31 July, the Bank of Japan (BOJ) unanimously decided to keep its policy rate at 0.50%, extending the pause in its hiking cycle from subzero rates that began in March last year. The decision was expected by market analysts.

BOJ raises inflation forecasts: Regarding Japan’s economic outlook, the BOJ toned down its concerns about trade uncertainty, likely reflecting the Japan-U.S. trade deal that had been reached just over a week prior. However, that wasn’t enough to prompt the BOJ to raise interest rates. The BOJ said that it is still “highly uncertain” how trade policies will affect the global economy, and also raised its inflation forecasts for the next three fiscal years. This suggests the BOJ is making progress on entrenching inflation at its 2.0% target after decades of deflation, reducing the need for a hike.

Consensus Forecast stays largely stable: Our panelists’ forecasts for Japan’s policy rate at the end of this year have remained largely stable since early May. Our panelists see the BOJ raising its policy rate by 25 basis points in Q4. This aligns with the BOJ’s forward guidance that it will “continue to raise” its policy rate assuming its outlook for GDP growth and inflation is realized. The BOJ’s next meeting is scheduled for 18–19 September.

Panelist insight: EIU analysts commented: “Given the BOJ's more positive view on growth and increased caution on inflation, we now expect the central bank to bring forward its policy rate increase of 25 basis points to the fourth quarter of 2025, rather than waiting until the first quarter of 2026.” Goldman Sachs analysts remain hawkish: “Similar to the January rate hike this year, assuming that wage increase momentum in next year's shunto negotiations can be confirmed in January 2026 […] we maintain our base case scenario of the next rate hike being in January 2026.”

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