Bank of Japan holds rates, but raises inflation forecasts
By Josh White
Date: Thursday 31 Jul 2025
(Sharecast News) - The Bank of Japan held its benchmark interest rate at 0.5% on Thursday, while raising its inflation forecasts more than expected, in a sign it could be edging closer to another rate hike.
Its decision, which was unanimously supported by the bank's nine-member board, came alongside a quarterly outlook report that showed improved confidence in both price and growth trends, and a more tempered view on trade-related risks.
The central bank lifted its forecast for core inflation in the current fiscal year to 2.7%, up from 2.2% in April, citing persistent increases in food prices.
It also nudged up projections for the 2026 and 2027 financial years, forecasting inflation at 1.8% and 2.0%, respectively.
Economists had expected a more modest revision to 2.5% for this year.
Markets responded calmly, with the yen strengthening slightly against the dollar and Japanese government bond yields ticking higher.
The BoJ's revised projections marked a significant shift in tone.
For the first time in this cycle, the bank described the balance of risks to its inflation outlook as "roughly balanced" -a step up from its previous warning of downside risks.
At the same time, the bank softened its view on trade uncertainty, noting that risks "remain high," down from "extremely high" in its May report.
The shift reflected recent positive developments, including the 22 July trade agreement between Japan and the United States, which lowered US tariffs on Japanese auto and goods imports to 15%.
"There have been positive developments in trade and other policies," the BoJ noted in its report.
"That said, high uncertainties remain regarding negotiations between jurisdictions and the impact of trade and other policies on economic activity and prices at home and abroad."
Governor Kazuo Ueda offered little clarity on the timing of any future rate move.
Analysts said the BoJ was likely to take more time to assess the full impact of US tariffs and the trade deal before deciding on a hike.
The BoJ raised interest rates for the first time in over a decade earlier in the year, exiting its long-standing ultra-loose policy.
While Ueda had adopted a cautious approach since then, persistently high living costs - especially for food - and recent political pressure were sharpening the focus on inflation.
The latest projections suggested Japan was now among the most inflationary economies in the G7, with core prices continuing to rise even as consumption remains weak.
"The yen climbed immediately after the Bank of Japan opted to maintain its interest rates, as expected," noted Patrick Munnelly, market strategist at TickMill.
"Market attention is now shifting toward an upward revision in inflation projections.
"Speculation is mounting among traders that rate hikes could become a possibility later this year."
Reporting by Josh White for Sharecast.com.
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