BOJ holds rates at 1%, warns of core inflation exceeding 2% target

The Bank of Japan kept its policy rate steady on Friday, as it warned that core inflation in the country could exceed its 2% target.

Japan's central bank's move to hold rates at 1% was an 8-1 decision, with board member Hajime Takata proposing a hike to 1.25%.

In its outlook, the BOJ said that core inflation was likely to accelerate to a level "clearly above" 2% from the second half of its 2026 fiscal year, which runs from September to March.

It cited wage increases being passed along into selling prices, the rise in crude oil prices and the recent depreciation of the yen. Inflation should then come down toward 2% as crude oil prices decline, it said.

Japan's core inflation for July came in at 1.6%, and has been below 2% for most of 2026.

The decision comes as Tokyo reportedly conducted an intervention on Thursday night, in conjunction with U.S. authorities executing a "rate check," a move usually seen as a precursor to intervention.

The yen was trading around the 163 level against the dollar, before rallying strongly to as high as 157.96. "The key signal from last night's move is that MOF remains uncomfortable with excessive yen weakness. The line in the sand is probably better viewed as a zone around 162-165 rather than a specific level," said Masahiko Loo, senior fixed income strategist at State Street Investment Management.

The move also comes as speculation continues to swirl around whether the Bank of Japan will boost rates at a faster pace.

BOJ officials are open to moving faster than the current market view of one hike every six months, Bloomberg reported before the decision, citing people familiar with the matter.

While it did not say if it will quicken the pace of rate hikes, the BOJ also said as underlying inflation has been approaching 2% and financial conditions have been accommodative, it will continue to raise the policy interest rate. This was to keep the risk of inflation deviating upward to a level above the price stability target of 2% and "exerting an adverse impact on the economy afterward."

Given this, a hike in September or October is possible rather than the usual six-month interval, Loo said.

Analysts have also drawn attention to BOJ Governor Kazuo Ueda's communications after the policy decision, saying that Ueda's statements will be where markets take their cue from. "The more important question is whether Governor Ueda and the BOJ signal an acceleration in the pace of future hikes. This will be the focal point of the meeting, and Ueda's press conference will be where markets look for answers," according to Wataru Aso, product specialist at RBC BlueBay Asset Management, in a note.

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