BOJ holds rates steady, but preps markets for rises with inflation forecast
By Frank Prenesti
Date: Friday 23 Jan 2026
(Sharecast News) - The Bank of Japan held its key interest rate unchanged at 0.75% and raised its growth and inflation forecasts for the economy, suggesting this could be enough to raise the cost of borrowing as the country prepared for a snap election next month.
In a quarterly outlook report, the BOJ raised its economic growth forecast for the fiscal year ending in March 2026 to 0.9% from 0.7% in October 2025 and also raised its GDP expansion outlook for the period to 1% from 0.7%.
It also revised up its core consumer inflation forecast to 1.9% from 1.8% three months ago, adding that risks to the economic and price outlook were roughly balanced.
"The mechanism in which wages and prices rise moderately in tandem will be sustained, allowing for underlying inflation to continue rising moderately," the central bank said.
It also emerged that bank board member Hajime Takata had proposed raising rates to 1%, saying that risks to prices in Japan were skewed to the upside.
The bank, which forecast inflation to fall below the 2% target in the first half of the year, expects underlying inflation to "continue rising moderately".
December inflation data, which was released earlier in the day, showed headline price growth coming in at 2.1%, its lowest since March 2022, but still above the BoJ's target of 2% for the 45th consecutive month.
Japanese markets have been hit by volatility caused by Prime Minister Sanae Takaichi's decision to go to the polls on February 8 and her plans for a stimulus package and suspension of the 8% sales tax on food. Economists fear the government could issue more debt, which has led to a spike in bond yields.
"Her proposals are difficult to square with Japan's public debt, which sits near 215% of GDP. The measure alone would cost roughly 5 trillion yen per year (around $30bn), and crucially, no clear financing plan has been outlined," said Swissquote Bank analyst Ipek Ozkardeskaya.
"All this is happening at the same time, the BoJ is willing to normalise policy and is no longer absorbing bonds at the pace it once did."
"Japanese investors are among the largest holders of US Treasuries. As yield differentials between the US and Japan narrow, incentives to repatriate capital increase - potentially draining global liquidity and triggering broader market selloffs."
"This risk surfaced several times last year without fully materialising, likely thanks to ample global liquidity. The open question is for how long that buffer can last."
Reporting by Frank Prenesti for Sharecast.com
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