Bank of Japan Stands Pat But Weak Yen Threatens Inflation Outlook — Update

By Megumi Fujikawa

TOKYO--The Bank of Japan kept monetary policy unchanged as it assesses the impact of its recent interest-rate increase, though the central bank's governor signaled growing concerns about inflation overshooting its goal.

As widely expected, the central bank maintained its policy rate at 1.0% at the end of its two-day meeting on Friday. It raised interest rates to a three-decade high in June, citing the possibility that underlying inflation could exceed its 2% target.

Speaking at a postmeeting news conference, BOJ Gov. Kazuo Ueda said such a risk is too big to ignore. "If we judge that financial conditions are too accommodative, it is entirely possible that we could accelerate the pace of interest rate hikes," he said.

While inflationary pressures persist, BOJ policymakers are closely watching the effects of the June rate increase, developments in the Middle East and subsequent moves in oil prices before taking further action.

Ueda said foreign-exchange rates have also become one of the most important drivers of prices, with currency fluctuations having a greater impact on inflation trends than in the past.

The yen surged against the dollar overnight on suspected government intervention after its fall to a 40-year low heightened inflationary fears.

Finance Minister Satsuki Katayama on Friday declined to confirm the action but highlighted international awareness of the currency's level, noting it was meaningful that U.S. Treasury Secretary Scott Bessent sent a message warning of potential yen undervaluation once the effects of Prime Minister Sanae Takaichi's growth strategy show results.

On Friday, mounting price risks contributed to a split decision. The vote to hold was 8-1, with hawkish board member Hajime Takata proposing increasing the policy rate to 1.25%. Takata said Japan has likely entered a "new phase" in which the bank needs to take a "nimble approach" against external threats, such as demand shocks caused by overseas developments, according to the BOJ statement.

Some analysts expect the central bank to make a policy change in the near term to cope with inflationary threats.

The BOJ could potentially next raise interest rates in September or October, sooner than the widely expected six-month interval, said Masahiko Loo of State Street Investment Management. The strategist expects the BOJ to gradually move toward a 1.5%-1.75% terminal rate.

The quarterly outlook report released Friday showed that the BOJ policy board continues to expect underlying inflation to reach the bank's 2% target in the near future.

The board expects consumer inflation, excluding volatile fresh-food prices, to average 2.5% in the fiscal year ending March 2027, slightly below the 2.8% projected in its April report. It expects prices to rise 2.4% in the year ending March 2028 and 2.0% the following year.

The central bank expects Japan's economy to grow 0.6% in the current business year, compared with the 0.5% expansion forecast three months ago. It projects growth of 0.8% in each of the subsequent two fiscal years.

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

(END) Dow Jones Newswires

July 31, 2026 05:41 ET (09:41 GMT)