Bank of Japan holds rate at 1.25% and says underlying inflation has reached 2%

The Bank of Japan (BoJ) left its policy rate, the short-term interest rate it sets, at 1.25% on 30 October 2026. Eight of the nine board members backed the decision. The bigger news sat in its quarterly Outlook Report, which says underlying inflation has now reached the 2% target, a milestone that makes a rate increase in December a real possibility.

What the BoJ decided

The hold matched the economic calendar forecast of 1.25%, which was also the previous level, so the rate decision itself was no surprise. The vote was not unanimous, though: one board member voted against keeping rates where they are. The bank published its Statement on Monetary Policy together with its Outlook for Economic Activity and Prices, the report it updates four times a year.

Underlying inflation reaches the target

For years the BoJ argued that price gains in Japan were driven by temporary factors rather than a lasting trend. In this report the bank says its indicators of underlying inflation have reached 2%, the level it aims for. Bloomberg reported that this is the first time the bank has judged the price trend to be at its target. That shift matters because the BoJ has tied further rate increases to steady progress towards 2%, and it now leaves room for a move at the December meeting.

1. 1Price trend hits 2%Underlying inflation gauges reach target
2. 2Goal judged metOutlook Report confirms the milestone
3. 3December move possibleNext rate increase now openly considered

Faster sales of ETF holdings

The BoJ also changed how quickly it disposes of the exchange-traded funds (ETFs), baskets of Japanese shares it bought during years of crisis-era support. It will now sell them at a pace of about ¥860 billion a year, roughly $5.5 billion, according to Bloomberg. The bank also amended its basic principles for disposing of ETFs and J-REITs, the listed real estate funds it holds. Together, these steps continue the slow unwinding of its unusual stimulus tools.

Read alsoBank of England preview: Bank Rate forecast at 4.00%, up from 3.75%

Why traders pay attention

Interest rate expectations are one of the main forces behind a currency, because they shape the return investors earn on holding it. Bloomberg reported that the yen held gains it had made against the US dollar after the announcement, and strategists cited the inflation signal as the reason. For traders, the message is that the gap between Japanese rates and those elsewhere is again a live question. Japanese stocks are also in focus, given the faster ETF sales.

What comes next

The December meeting is now the key date on the BoJ calendar. Before then, Japanese price and wage data will show whether the 2% trend the bank describes holds up. The single dissent at this meeting is also worth watching, as it shows at least one board member was ready to act differently today.

Sources: Bank of Japan, Bloomberg, ForexFactory.