The Bank of Japan held its policy rate at 1.25%, its highest since 1995, and for the first time since adopting a 2% inflation target in 2013 declared that underlying inflation is "generally consistent" with that target. The decision was split 8-1, with board member Hajime Takata dissenting in favour of a hike to 1.5%. The central bank also upgraded its inflation forecasts and flagged that price pressures could push inflation above target.
The BOJ had previously described underlying inflation as “approaching 2 percent.” The bank upgraded its inflation forecast for fiscal year 2027 to 2.6% from 2.4%, and its “core-core” measure, which strips out fresh food and energy prices, to 2.7% from 2.6%. It warned that “firms' behavior has been shifting more toward raising wages and prices and there are various factors that could drive up prices.”
Krishna Bhimavarapu, APAC economist at State Street Investment Management, described the decision as a “hawkish hold.” He said the BOJ expects more hikes and is confident that the 2% target is being achieved through a “self-sustaining wage-price-consumption cycle.” However, he cautioned that Japan's growth does not justify rushing the next move and forecast that third-quarter GDP growth is likely to lose momentum, with consumption the weakest link.
A CNBC survey of 16 economists before the decision found that all expect the BOJ to set the stage for a rate hike in December or January as domestic inflation and wages continue to rise. Thirteen respondents said they expect the terminal rate, the level at which the BOJ is expected to stop its tightening cycle, to be 1.75% to 2% by around mid-2027.
The September core inflation reading hit 2.1%, the highest of 2026, overshooting expectations. Japan's inflation has been pushed up by a weak yen and high energy prices, though experts have told CNBC that CPI numbers are being held down by energy subsidies. 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.” Inflation-adjusted wages rose for an eighth consecutive month in August, climbing 1.5% from a year earlier, according to government data.
The BOJ's declaration that inflation is aligned with its target could set the stage for further rate increases, affecting global carry trades and yen exchange rates.
Upgraded inflation forecasts suggest tighter monetary policy ahead, which may influence borrowing costs and economic growth in Japan.
The decision signals that Japan's decades-long battle with deflation may be over, with a self-sustaining wage-price cycle taking hold.
Background
The BOJ adopted a 2% inflation target in 2013. For most of the period since, it described inflation as "approaching" that level. The current rate of 1.25% is the highest since 1995, reflecting a gradual tightening cycle.
Key Perspectives
BOJ majority (8-1): Voted to hold rates at 1.25%, noting that underlying inflation is now generally consistent with 2%, but flagged upside risks from firms raising wages and prices.
Hajime Takata: Dissented, favouring a hike to 1.5%.
Krishna Bhimavarapu (State Street): Called the decision a "hawkish hold," saying that while more hikes are expected, growth does not justify rushing the next move; consumption remains weak.
Economists surveyed by CNBC: All expect a rate hike by January, with a terminal rate of 1.75% to 2% by mid-2027.
What to Watch
The next BOJ meeting in December or January, when a rate hike is widely expected.
September's core CPI reading and subsequent inflation data to gauge whether price pressures persist.
Japan's third-quarter GDP figures, which could signal whether growth warrants further tightening.
12 claims in this story checked against 1 source: 10 supported.
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SupportedThe BOJ said underlying inflation was generally consistent with its 2% target for the first time since adopting the target in 2013.US Top News and Analysis: “The Bank of Japan declared that underlying inflation in the country was "generally consistent" with its target of 2%, the first time it has made that assessment since adopting the target in 2013.”
SupportedThe BOJ held its policy rate at 1.25%, its highest level since 1995.US Top News and Analysis: “This comes as the central bank expectedly held rates at 1.25%, still at its highest level since 1995.”
SupportedThe decision was split 8-1, with Hajime Takata dissenting in favour of a hike to 1.5%.US Top News and Analysis: “The decision was split 8-1, with board member Hajime Takata dissenting. Takata had wanted the bank to hike its policy rate to 1.5%.”
SupportedThe BOJ raised its fiscal 2027 inflation forecast from 2.4% to 2.6% and its core-core forecast from 2.6% to 2.7%.US Top News and Analysis: “The BOJ also upgraded its inflation forecast for its fiscal year 2027 to 2.6% from 2.4%, with the so-called "core-core" inflation forecast also raised to 2.7% from 2.6%.”
SupportedThe BOJ warned that firms’ behaviour and other factors could drive prices up.US Top News and Analysis: “"firms' behavior has been shifting more toward raising wages and prices and there are various factors that could drive up prices."”
SupportedKrishna Bhimavarapu described the decision as a “hawkish hold” and said the BOJ sees more hikes ahead.US Top News and Analysis: “Describing this as a "hawkish hold," Krishna Bhimavarapu, APAC economist at State Street Investment Management said that the BOJ sees more hikes ahead”
Partly supportedBhimavarapu said the BOJ is confident the 2% target is being achieved through a self-sustaining wage-price-consumption cycle.US Top News and Analysis: “the BOJ sees more hikes ahead and is increasingly confident that the target is being achieved through a "self-sustaining wage-price-consumption cycle."”
SupportedBhimavarapu said Japan’s growth does not justify rushing the next move, and forecast that third-quarter GDP growth would likely lose momentum, with consumption the weakest link.US Top News and Analysis: “However, he also added that growth in the country does not justify rushing the next move. Bhimavarapu forecasts that Japan's third quarter GDP growth is likely to lose momentum, with consumption still the weakest link in the cycle.”
SupportedA CNBC survey of 16 economists before the decision found all expected the BOJ to set the stage for a rate hike in December or January.US Top News and Analysis: “A CNBC survey of 16 economists before the decision revealed that all surveyed expect the BOJ to set the stage for a rate hike in December or January next year”
SupportedThirteen respondents expected a terminal rate of 1.75% to 2% around mid-2027.US Top News and Analysis: “Thirteen respondents said they expect a terminal rate, or the level at which the BOJ is expected to stop its tightening cycle, of 1.75% to 2% by around mid-2027.”
SupportedSeptember core inflation was 2.1%, the highest of 2026, and overshot expectations.US Top News and Analysis: “The most recent inflation numbers for September revealed core inflation hit their highest level in 2026, coming in at 2.1% and overshooting expectations.”
Partly supportedFinance Minister Satsuki Katayama reportedly told parliament that Japan is “on the cusp of shifting to a period of sustained inflation driven by rising wages.”US Top News and Analysis: “Earlier this month, Finance Minister Satsuki Katayama reportedly told parliament that Japan was "on the cusp of shifting to a period of sustained inflation driven by rising wages."”
