BOJ Stands Pat as 3% Inflation Persists, Markets Anticipate Future Hikes

The Bank of Japan (BOJ) maintained its key policy rate at 0.5% for the fifth consecutive meeting on September 19, 2025, despite persistent inflation above 3% and growing wage pressures. The decision, announced after a two-day monetary policy meeting, aligned with expectations from economists and investors, who had anticipated a wait-and-see approach amid uncertainties surrounding U.S. tariff policies and domestic political developments. Following the announcement, the yen strengthened against major currencies, including the U.S. dollar, as markets interpreted the rate hold as a signal of prolonged accommodative policytitle1^[1].

The BOJ’s decision reflects its cautious stance on tightening monetary conditions, even as underlying inflation trends show signs of durability. Governor Kazuo Ueda emphasized that rate hikes would depend on whether inflation remains on a sustainable path toward the 2% target, acknowledging risks from global trade tensions and food price volatility. The central bank raised its core inflation forecast for fiscal 2025 to 2.7%, up from 2.2% in April, but tempered this with a revised growth outlook, citing concerns over U.S. tariffs and global economic softness. Analysts note that the BOJ’s flexibility contrasts with its previous requirement for inflation to be "firmly at 2%" before acting.

A notable development during the meeting was the BOJ’s announcement to begin selling exchange-traded funds (ETFs) to manage market liquiditytitle1^[1]. This move marks a departure from its traditional intervention strategies and signals a shift toward more nuanced tools to stabilize the yen. The ETF sales plan, combined with the rate hold, aims to address speculative pressures while avoiding abrupt policy shifts that could destabilize the markettitle1^[1].

Market participants have closely watched the BOJ’s path toward normalization. While the central bank has not signaled immediate hikes, surveys of economists suggest a growing consensus for a gradual tightening cycle. A majority of analysts in a July poll predicted a 25-basis-point rate increase by year-end, with the first hike likely in October 2025 or January 2026. This outlook is supported by internal BOJ discussions, where at least one board member has advocated resuming rate hikes sooner rather than later. However, the central bank remains cautious, citing the need for further data on wage growth and inflation persistence.

The yen’s post-decision strength highlights the market’s nuanced interpretation of the BOJ’s strategy. While the rate hold confirmed expectations of delayed tightening, the ETF sales plan and inflation forecasts were seen as steps toward eventual normalization. This duality has led to a mixed reaction, with the yen benefiting from perceived policy stability while investors remain cautious about the pace of future hikestitle1^[1].

The BOJ’s next scheduled monetary policy meeting is set for October 29–30, 2025. Until then, markets will closely monitor domestic wage negotiations, global trade developments, and inflation data to gauge the central bank’s trajectory. For now, the balance between inflation resilience and external risks ensures the BOJ’s accommodative stance remains intact, albeit with a clear path toward gradual normalization.