Bank of Japan Holds at 1.25% but Declares Its 2% Inflation Goal Met, Opening the Door to a December Hike

The Bank of Japan left its short-term policy rate unchanged at 1.25% on Friday, but the decision itself was the least important part of the announcement. In its quarterly outlook report, the central bank said underlying inflation in Japan is now broadly in line with its 2% price target, effectively declaring an end to a pursuit that began under former governor Haruhiko Kuroda's massive stimulus programme in 2013.

The shift in language matters because it changes the BOJ's job. For most of its history since gaining independence in 1998, the bank has fought deflation or price growth that was too weak. From here, its stated focus is on keeping inflation anchored around 2% and preventing it from overshooting, which is the same posture the US Federal Reserve and the European Central Bank have held for years.

A hold, but not a unanimous one

The two-day meeting ended with the rate unchanged, as markets had widely expected. The BOJ had already raised rates in June and again in September, a faster cadence than the roughly twice-a-year moves seen in 2024 and 2025, and policymakers chose to pause and study how those increases are feeding through to lending conditions.

The vote was not unanimous. Board member Hajime Takata dissented and proposed lifting the rate to 1.5%, a sign that at least part of the board sees no reason to wait.

Most economists surveyed ahead of the meeting expect that next step to come in December, with a terminal rate somewhere between 1.75% and 2% over the following year.

Forecasts move higher

The bank raised its core consumer inflation projection for the fiscal year ending March 2028 to 2.6%, up from 2.4% three months ago. It also lifted its estimates for inflation excluding fresh food and fuel for fiscal 2027 and 2028, and said long-term inflation expectations among households and businesses are now moving around 2%.

Another notable change: the BOJ said real interest rates have been rising recently. In July it had described them as negative across short- and medium-term maturities. Rising real rates suggest policy is becoming less loose even without a fresh hike.

The surprise: faster ETF selling

The one move markets did not see coming was on the balance sheet. The BOJ said it will sell its holdings of exchange-traded funds at a pace of 860 billion yen (about $5.45 billion) a year from January, up from 330 billion yen now. The ETF stockpile was built up over a decade of equity purchases meant to support asset prices, and unwinding it faster signals confidence that Japanese stocks no longer need that prop.

Why it matters beyond Japan

Japan's inflation has been pushed higher by a weak yen, elevated import costs and the energy shock linked to the Iran war. A central bank that is now openly hawkish raises the prospect of a stronger yen and higher Japanese bond yields over time, which can pull capital back home from overseas markets, including emerging markets such as India, where Japanese investors are significant holders of bonds and equities.

There is also a domestic risk. Many Japanese households have little lived experience of sustained price rises, and persistent inflation could squeeze consumption if wage gains fail to keep pace. That trade-off will shape how quickly the BOJ moves in December and beyond.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.