Bank of Japan holds at 1.25% as inflation milestone opens door to further hikes

The Bank of Japan kept its policy interest rate at 1.25% on October 30, as expected, leaving it at its highest level since 1995.^[1][2]

The central bank also declared that underlying inflation—the more persistent pressure on prices—had reached its 2% target, its first such declaration since adopting the target in 2013.^[1]That assessment supports further rate increases, although the bank chose to hold at this meeting.^[2]

The BOJ’s judgment that inflation has reached its target gives it a stronger basis for further hikes.^[1][2]If policy rates rise, banks can charge more as loans reset, although their net benefit depends on how much deposit costs increase; businesses with floating-rate loans or debt to refinance could face higher interest bills.^[2]

Rates also reach businesses through the yen. The US two-year Treasury yield stood at 4.56% on October 30, down from 4.61% the previous session. If Japanese rates rise while US yields hold steady or fall, the interest-rate disadvantage of yen assets relative to dollar assets could narrow, supporting the yen; a stronger yen would reduce the yen value of Japanese exporters’ overseas profits. The BOJ’s signal makes this channel more relevant, with the outcome still depending on both countries’ rate paths.^[2]

Impact

What to watch next

• November 6 US October jobs report: employment and wage figures will inform US rate expectations, helping test whether the US–Japan rate gap could narrow and support the yen.