Bank of Japan leaves rates at 1.00% with no surprises

There were no surprises at today’s BoJ meeting, where the policy rate was left unchanged at 1.00%. In our BoJ preview, we discussed the possibility of hawkish dissenters and only Hajime Takata voted in favour of a consecutive rate hike, repeating his stance from January.

The Outlook Report on economic activity and prices contained sparse changes to forecasts. Growth was very slightly revised up for FY26 and FY27, while CPI changes were minimal. Here, the BoJ expects that after government measures to suppress energy prices end in September, CPI will rise towards 2.0% early next year and largely remain there.

In terms of risks, the Outlook Report continues to point to balanced risks to growth, but upside risks to prices given wages, energy, the AI boom and the weak yen. The BoJ’s formal position is that it will continue to tighten policy – probably towards a neutral rate at 2.00%. But with the government transitioning the economy toward growth and seeking supportive conditions, the BoJ may take two years to raise the policy rate to 2.00%.

The market currently prices 20bp of tightening for the October meeting. Speaking at today's press conference, BoJ Governor Kazuo Ueda said the BoJ will have "firm discussions" from the next meeting on. That could potentially see chances of a 25bp hike at the 18 September BoJ being marked higher. The yen has received a little intraday support on the headline.

Those in the FX or bond markets looking for some BoJ support for the yen or the long end of the JGB market will be a little disappointed, rather than surprised. There seems little urgency for the BoJ to accelerate its tightening cycle. This leaves Japanese authorities counting on guerrilla intervention tactics to curb the USD/JPY rally – backed by moral support from Washington.

With the Japanese real policy rate deeply negative and only being adjusted gradually, it is hard to see BoJ policy having any meaningful impact on the USD/JPY trend. Instead, it will either be a Fed which avoids tightening (ING’s house call) or Japanese government measures to direct/encourage more investment in Japanese domestic assets which finally turns this USD/JPY bull trend.

For JGBs, a lack of urgency to raise rates suggests the back end of the curve can remain quite steep – something that my colleague Padhraic Garvey discussed in our preview.