Bank of Japan: Hawkish forecasts, neutral governor
As the BoJ raises its growth and inflation forecasts while the governor stays cautious, a look at what these mixed signals mean for market expectations.
Duration: 3 Mins
Date: Jan 23, 2026
The Bank of Japan (BoJ) voted to leave the unsecured overnight call rate at 75 basis points (bps) at its policy meeting on January 22–23.
The central bank, which raised its policy rate just a month ago, thought it too early to judge the impact of this move. However, it believes that underlying inflation is rising but not exceeding its target.
One board member, Hajime Takata, voted for a 25 bps hike, repeating the previous meeting’s dissent, as he believes price stability has “more or less been achieved.”
The forecasts in the Economic Outlook were upgraded from the prior October report (Table 1).
Table 1. BoJ forecasts revisions reflect fiscal impact
Source: BoJ, January 2026.
GDP growth for FY2026 was revised up 0.3 percentage points to 1% year on year to reflect the impact of corporate investment strength and of the host of government measures to tackle the cost-of-living crisis. However, this fiscal impulse is expected to fade in the next year.
While the core CPI (excluding fresh food) and core-core (excluding fresh food and energy) inflation measures were revised higher, it was noted that the CPI outlook remains largely unchanged.
Key risks highlighted in the report include external ones, such as trade policies and global inflation, wage and price-setting behaviors and market volatility.
The market interpreted the Outlook report as hawkish; OIS probability for an April hike briefly jumped from 66% to 78% although this unwound over the course of Governor Kazuo Ueda’s more neutral tone during the press conference.
A neutral press conference
The overall tone of the press conference was more dovish than investors had expected. Ueda remained cautious about the outlook and continued to stress that the path for policy is data dependent.
While the inflation forecasts were revised higher, Ueda acknowledged that the BoJ expected a strong disinflation trend over the next two quarters.
Indeed, the December CPI report, published just ahead of the BoJ policy announcement, supported this view.
Headline inflation slowed from 2.9% year on year to 2.1% as Prime Minister Sanae Takaichi’s gasoline subsidies kicked in. Western core inflation fell by 0.1 pt to 1.5% year on year as services inflation slowed (Chart 1).
Chart 1. The BoJ expects near term disinflation …
Food prices remained elevated in December but are expected to decline over the coming months as the supply shock to rice prices last year gradually unwinds.
Ueda said the BoJ will monitor three key indicators for sustainable inflation:
- Corporate behavior at the start of the new fiscal year, with April is the opportunity for firms to announce price hikes.
- Momentum of spring Shuntō wage negotiations and the feedthrough to realized wages, which will be critical for the outlook for underlying inflation.
- Services inflation, viewed as a measure of underlying domestic inflation trends, remains subdued.
Ueda cautioned that wage talks in 2025 were very successful, but realized earnings remain subdued (Chart 2). He noted this trend may shift over time due to labor shortages.
Chart 2. … and acknowledges stronger wage growth needed
A volatile market backdrop
The start of the election campaign triggered turbulence in Japanese government bond market (JGB).
The lower house election is set for 8 February, and the election dynamics have been complicated by the formation of a new opposition bloc, the “Centrist Reform Alliance” – a merger between the Constitutional Democratic Party (CDP), the second largest party, and Komeito, the ruling Liberal Democratic Party (LDP)’s former coalition party.
A weak 20-year JGB auction and reports of a potential food VAT cut sparked fiscal concerns, fueling the bond market rout. Previously, Takaichi opposed such cuts in favor of a “refundable tax credit,” but now proposed a temporary two-year cut estimated to be worth JPY5 trillion annually.
Regarding this week’s JGB volatility, Ueda stated the central bank and the Ministry of Finance (MoF) together monitor markets and there are several tools available to help stabilize markets in exceptional circumstances. He also emphasized that the volatility this week had been driven by fiscal concerns, not monetary ones, and it is the government’s responsibility to secure market trust regarding fiscal consolidation.
Carefully timing the next move
When questioned over the pace of hikes, Ueda refrenced the steady pace seen last year, with hikes spaced 11 months apart. The BoJ intends to assess the impact of those hikes, alongside wage momentum over the coming months to determine the timing of the next rise. We maintain our view that the central bank will hike 25 bps to 1% in October.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
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