Japan's Central Bank Makes Hawkish Hold as Board Split Widens —Update

By Megumi Fujikawa

TOKYO--The Bank of Japan extended its rate pause but signaled that hikes are firmly on the table as it raised inflation forecasts and more board members pushed to tighten policy settings.

As widely expected, the Japanese central bank kept its policy rate at 0.75% at the end of its two-day meeting on Tuesday. But a 6-3 split with three members voting in favor of a rate hike showed that hawkish momentum on the board is building.

It is "unusual" to see three dissenting votes at a BOJ meeting, said Mitsubishi UFJ Morgan Stanley Securities strategist Naomi Muguruma, viewing the outcome as a hawkish hold.

Board members Hajime Takata, Naoki Tamura and Junko Nakagawa all called for a hike to 1%. While Takata and Tamura are known to be supporters of tighter policy, Nakagawa's opposition came as a surprise as she is seen as more of a centrist.

"Nakagawa's dissent may have been a strategic move to signal to the public that support for rate hikes is gaining traction across the board, rather than being confined to the usual two" rate-hike proponents, said Mizuho Securities economist Yusuke Matsuo.

The yen strengthened after the outcome, briefly appreciating to near 158.90 against the dollar from around 159.50 before the decision.

The BOJ finds itself walking a tightrope as it balances the two-way risk of low growth and high inflation as energy costs drive up prices while simultaneously dampening economic activity. The Federal Reserve and European Central Bank are also expected to stand pat this week.

Many other central banks in Asia too have decided to stay on the sidelines until the impact of the war becomes clearer, though Australia, Singapore and the Philippines have all opted for tightening.

As the Middle East conflict pushes up oil prices, the Japanese central bank upgraded its price outlook in its latest quarterly report and introduced the first projections for the 2028 fiscal year, which ends in March 2029.

The BOJ policy board expects consumer inflation, excluding volatile fresh food prices, to reach 2.8% in the year ending March 2027, compared with the 1.9% rise projected previously. It anticipates that consumer prices will rise 2.3% in the year ending March 2028 and climb 2.0% the following year.

While energy supply shocks could raise prices for goods and services in related sectors, flight-to-safety demand for the dollar sparked by the conflict has been weakening the yen, further threatening to accelerate inflation.

The bank also tempered its growth expectations for the Japanese economy to 0.5% in the current business year, lower than the 1.0% expansion forecast three months ago. Growth is projected at 0.7% and 0.8% over the subsequent two fiscal years.

Now that underlying consumer inflation is approaching the 2% target and companies are more actively passing on higher costs via wages and prices, the BOJ said it needs to avoid a spike in inflation that could cool the economy.

Mitsubishi UFJ's Muguruma said the language serves as a warning about the risk of falling behind the curve if the bank waits too long to hike again.

"It shows that even though the economy is slowing down, there will be no major change to the BOJ's path toward achieving the 2% target," she said.

As inflationary risks mount, many economists--including Mitsubishi UFJ's Muguruma and Mizuho's Matsuo--expect the BOJ to lift interest rates to 1% at its next meeting in June.

The BOJ said it will determine the timing and pace of policy changes, while carefully monitoring the impact of the Middle East conflict on the economy.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

April 28, 2026 01:38 ET (05:38 GMT)