BOJ Holds 0.5% Rate as 2025 Inflation Forecast Hikes to 2.7%

The Bank of Japan (BOJ) held its benchmark interest rate at 0.5% during its July 31, 2025, policy meeting, as widely anticipated by markets. However, it raised its core inflation forecast for fiscal year 2025 (FY2025) to 2.7% from the prior 2.2%, reflecting stronger-than-expected price pressures in the near term. The adjustment was made unanimously by the nine-member Policy Board, with no direct statements attributed to individual members [1].

The inflation outlook for subsequent years was also revised. The BOJ projected core inflation to ease to around 1.8% in FY2026 and 2% in FY2027. This suggests a gradual normalization of inflationary trends after a period of elevated growth. The central bank noted that downside risks to growth remain but are now less severe compared to earlier assessments, while price risks are broadly balanced [2].

The BOJ also raised its growth forecast for FY2025 to 0.6%, with no changes to the projections for the following two years. The central bank has shifted its tone slightly, moving away from describing uncertainty as “extremely high” to a more balanced assessment of inflation and growth. This signals a cautious approach toward potential future rate hikes, although no immediate action was taken [3].

Market reactions to the announcement were subdued, with money market pricing remaining largely unchanged. A 25 basis point rate hike is still priced in for about 80% of scenarios by the end of the year. The Japanese yen gained slightly against the U.S. dollar, with USD/JPY trading near 148.9, reinforcing the view that investors had largely priced in the BOJ’s decision [4].

Analysts suggest that the upward revision in the inflation forecast could provide a basis for future tightening, especially if price pressures continue to exceed expectations. However, the BOJ’s decision to keep rates steady reflects its ongoing focus on supporting economic recovery amid domestic and global uncertainties. The central bank appears to be balancing its dual mandate of maintaining price stability and supporting economic growth [5].

Following the announcement, the Nikkei 225 experienced a modest rise, as the market interpreted the revised inflation forecast—now at 2.7% from 2.5%—as a signal that the BOJ may begin tightening policy in the near future. This response underscores the market’s anticipation of a gradual shift in the central bank’s accommodative stance [6].

The BOJ’s decision highlights a measured and data-dependent approach to monetary policy amid evolving economic conditions. While inflation is on an upward trajectory, the central bank remains cautious, emphasizing stability while monitoring global and domestic economic developments. The revised forecasts indicate growing confidence in the resilience of the Japanese economy but also highlight the need for continued vigilance in the face of global headwinds.

Source:

[1] Seeking (https://seekingalpha.com/news/4475121-bank-of-japan-holds-rates-steady-at-05-as-expected)

[2] TradingEconomics (https://tradingeconomics.com/japan/interest-rate)

[3] AskTraders.com (https://www.asktraders.com/analysis/nikkei-225-rises-as-boj-holds-steady-signals-future-tightening/)

[4] FXStreet (https://www.fxstreet.com/analysis/the-fed-chair-didnt-bite-the-bait-when-asked-if-the-central-bank-would-cut-rates-in-september-202507310645)

[5] Reuters via TradingView (https://www.tradingview.com/news/economic-category/prices/)