Duration: 4 Mins
Date: Jul 31, 2025
As the Bank of Japan maintains interest rates while lifting its outlook, a look at why investors may want to take note as policy and reality begin to converge.
However, with still-high uncertainties around trade and domestic politics highlighted throughout the press conference, we expect policy rates to remain on hold until the first quarter of 2026.
That said, the specific timing of the next hike is dependent on progress toward a clear trade framework.
The BoJ voted unanimously to leave the unsecured overnight call rate at 50 bps at its policy meeting on July 30–31.
The policy statement welcomed the US-Japan trade agreement but made clear that risks to the outlook remain high.
Previously, the BoJ used the term “extremely uncertain” in reference to trade negotiations. This was softened only slightly to reflect trade progress and now states: “It remains highly uncertain how trade and other policies in each jurisdiction will evolve and how overseas economic activity and prices will react to them.”1
The inflation forecast for the current fiscal year was revised sharply higher to reflect the impact of the rapid increase in food prices. At the same time, growth was nudged higher following the sharp downgrade in April after the Liberation Day tariff announcements (Table 1).
Table 1. BoJ forecast revisions
Source: BoJ, July 2025.
While the minor growth upgrade was expected, the inflation forecast revisions were much greater than market expectations and initially fueled a “hawkish hold” interpretation.1 But this sentiment was reversed during BoJ Governor Kazuo Ueda’s press conference.
Despite many opportunities to guide investors over the timing of the next hike, Ueda held a firm neutral tone.
He welcomed the progress made in the recent trade negotiations but reiterated the impact of external risks from trade policy and the slower global growth backdrop. He also said that there remains a greater degree of uncertainty than usual around whether the BoJ’s economic projections will materialize.
The governor expects the price trend to rise gradually toward the central bank target. However, the BoJ needs to carefully check the impact of trade policy on wages and the inflation outlook.
Tariffs could affect corporate profits and winter bonuses as well as wage negotiations next spring. This is a critical point that could delay the next BoJ hike further.
While Shuntō spring wage negotiations have delivered record-high wage settlements, these have taken a long time to filter into realized wage growth (Chart 1).
Chart 1. The BoJ remains unconvinced about the future strength of wages and inflation
Indeed, there is now a growing debate about the 2026 spring wage negotiations potentially being weaker, in part due to the cumulative rise in wages so far and in part due to the hit from tariffs.
Ueda was also very firm in emphasizing that the revision to the FY 25 price view alone will not determine the BoJ’s policy. Current inflation is driven by supply-side factors and not demand, meaning rate hikes are less effective at controlling inflation in this environment.
The forecast revisions were broadly expected and reflect some improvements following the trade agreement. However, Ueda reiterated uncertainties over the outlook. For example, it is difficult to disentangle the impact of tariff-related front-loading demand in the data.
Questions on domestic politics and the impact of the election result on fiscal policy were broadly brushed off. Following the upper house election, the LDP-led coalition has no majority in either house. As a result, there will be more pressure to deliver increased spending on social security, childcare, and education.
While the governor declined to comment on the political outlook, he maintained that (a) the BoJ will examine the impact of fiscal policy once it has been decided, and (b) the bank will resist pressure from a more dovish prime minister and set policy in line with data developments.
The BoJ will also be mindful that the Japanese government bond market remains illiquid and highly sensitive to fiscal headlines. However, the central bank has the tools to manage bond market dislocation.
A supplementary budget is expected in the autumn, while a budget bill is expected to be debated in December. Prime Minister Shigeru Ishiba’s ability to hold onto power following the election has been questioned. The risk of a snap election in Q4 and a change of government remains high.
Overall, the uncertainties surrounding the details of the trade framework, domestic politics, and the fiscal timetable mean that we continue to believe the BoJ’s preferred time to hike rates again will be January 2026. The publication of the Economic Outlook, alongside the policy statement in January, will help communicate the decision. We are then penciling in another rate hike in early 2027, commensurate with a very gradual hiking cycle.
Endnotes
1 "BOJ turns less gloomy on economy, keeps rate-hike chance alive." Reuters, July 2025. https://www.reuters.com/business/boj-turns-less-gloomy-economy-keeps-rate-hike-chance-alive-2025-07-31/.
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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