Bank of Japan holds rates at 1.25% as it says inflation target has been met

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BOJ holds rates as inflation target met

Highlights

Bank of Japan holds interest rates at 1.25%, the highest since 1995, with eight out of nine board members backing the decision.
September core inflation reached 2.1%, beating expectations and marking the highest level in 2026, as analysts note government subsidies are masking stronger price momentum.
Inflation-adjusted wages rose 1.5% year-on-year in August, the eighth monthly increase, reinforcing trends of entrenched wage-driven inflation that could prompt further BOJ tightening.

Policy decision and inflation outlook

As reported by CNBC, the Bank of Japan says inflation is "generally consistent" with its 2% target while leaving interest rates unchanged at 1.25%, the highest level since 1995.

The decision is split 8-1, with board member Hajime Takata dissenting in favor of raising the policy rate to 1.5%. The central bank's latest stance comes as domestic inflation and wage growth continue to strengthen, supporting market expectations that the BOJ is moving closer to another rate increase.

A CNBC survey of 16 economists conducted before the decision shows all respondents expect the BOJ to prepare the ground for a rate hike in December or January. Thirteen of those surveyed expect the terminal rate in the current tightening cycle to reach 1.75% to 2% by around mid-2027.

Wages, prices and pressure on the yen

Japan continues to face inflationary pressure from a weak yen and elevated energy prices, even as government subsidies are helping restrain headline consumer price readings. Analysts cited by CNBC say those subsidies under the Takaichi administration are holding down CPI figures despite underlying price momentum.

The latest inflation data for September show core inflation at 2.1%, its highest level of 2026 and above expectations. Earlier this month, Finance Minister Satsuki Katayama reportedly told parliament that Japan is "on the cusp of shifting to a period of sustained inflation driven by rising wages."

Government data also show inflation-adjusted wages rise for an eighth straight month in August, up 1.5% from a year earlier. That trend adds to the case that wage-driven inflation is becoming more entrenched, a development that could influence the BOJ's next policy steps.

Mario Draghi’s warning on the inflation-fighting versus growth trade-off highlighted how keeping interest rates above growth for too long can worsen debt dynamics and raise pressure for “fiscal dominance.” Our earlier article noted that while central banks must prioritize price stability, policy and communication should aim for the lowest rate path consistent with the inflation objective to avoid unnecessary damage to investment, productivity, and long-term growth.

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