The Bank of Japan (BOJ) wrapped up its policy meeting on July 31 by deciding to keep its short-term benchmark interest rate unchanged at 0.5%. This marks the fourth consecutive meeting where the central bank has left rates steady, a move that largely met market expectations and underscores the BOJ’s cautious stance as it moves gradually toward policy normalization.
While interest rates remain unchanged, the central bank notably raised its inflation outlook. It now expects core consumer prices to rise 2.7% in fiscal year 2025, up from the previous forecast of 2.2%. A persistent rise in food prices—especially staples like rice—is a major factor behind this revision. The BOJ projects inflation to ease back to 1.8% in fiscal 2026, and inch up to 2.0% in 2027, suggesting a gradual return to price stability over the coming years.
On the growth front, the forecast for GDP growth in fiscal 2025 was slightly upgraded to 0.6%, up from 0.5% previously. Reduced uncertainty in trade relations with the U.S. is seen as a supportive factor for Japanese exports. Still, the central bank issued a cautious note—warning that risks to the economic outlook remain elevated over the next one to two years. These include the possibility of a global slowdown, shifts in trade policy, and ongoing pressure on corporate profits.
The BOJ also highlighted that real interest rates are still deeply negative, while inflation expectations are slowly trending upward. Overall, it sees the risks to prices as relatively balanced. The central bank reiterated that if the economy and inflation evolve as expected, it would seriously consider raising rates. However, any decision will depend on incoming data, signaling a wait-and-see approach in the near term.
The report also notes that the recent surge in food prices is partly driven by short-term factors like adverse weather. As those effects potentially fade, their upward pressure on CPI could lessen, giving the central bank more room to maneuver without rushing into tighter policy.
Interestingly, Japan’s latest policy decision aligns with that of the U.S. Federal Reserve, which also opted to hold steady this week. This synchronized approach by two major central banks offers a degree of stability in an otherwise volatile global financial landscape. With Japan slowly emerging from decades of deflation, the BOJ is expected to maintain a cautious watch on macroeconomic data before making any policy shifts in future quarters.
All in all, the message from this meeting was steady with a hint of tightening. The central bank remains highly alert to inflation risks while signaling a flexible approach amid growing global uncertainties. In the months ahead, market attention will likely center around trends in food prices, export growth, and any signs from the BOJ about the timing of its next policy move.
