The Bank of Japan held its policy rate at 1% on Friday in an 8-1 vote, warning for the first time that core inflation could run "clearly above" its 2% target. The decision followed a coordinated, intervention-led yen rally, and traders now price growing odds of an October rate hike.
BOJ holds rate, one member dissents
The Bank of Japan left its short-term policy rate unchanged at 1% on Friday, an 8-1 decision with board member Hajime Takata proposing a hike to 1.25%. The hold was widely expected after a hike to a 31-year high last month.
But the central bank broke from its usual language. In its quarterly outlook, the BOJ said core inflation was likely to accelerate to a level "clearly above" 2% from the second half of its 2026 fiscal year, which runs from September to March. It cited wage increases passing into selling prices, rising crude oil prices and the yen's recent depreciation.
Inflation should then ease back toward 2% as oil prices decline, the bank said. Japan's core inflation for July stood at 1.6%, below the 2% mark for most of 2026.
Yen swings after coordinated intervention
The rate decision came after Tokyo reportedly conducted a yen-buying intervention overnight, alongside U.S. authorities running a "rate check," a step usually seen as a precursor to intervention. The yen had been trading around 163 against the dollar before rallying as high as 157.96.
By Friday, the dollar had clawed back 0.75% to trade at 160.670 yen. That followed the previous session's 2.4% slide, the biggest one-day drop since January 2023. South Korea also intervened, selling dollars on Thursday in a rare coordinated move; the won touched a nine-month high before paring gains to trade roughly 1% weaker at 1,438.1 per dollar.
According to CNBC: State Street Investment Management senior fixed income strategist Masahiko Loo said the overnight move showed "MOF remains uncomfortable with excessive yen weakness." A separate strategist, J.P. Morgan Asset Management's Kerry Craig, said defending the currency through intervention alone is unlikely to set a sustained trend higher for the yen.
Ueda signals more hikes, markets eye October
BOJ Governor Kazuo Ueda told reporters after the decision that the bank expects to keep raising interest rates in response to economic, price and financial developments, while weighing the timing and pace of each move. He said Japan's financial conditions remain accommodative even after the latest rate hike, and that the bank must stay mindful of the risk of an inflation overshoot.
Markets are pricing roughly 77% odds of no change at the September meeting, but that shifts sharply for October, where traders assign about 64% odds of a hike, with roughly 25 basis points of tightening priced in by year-end. Most analysts polled by Reuters expect the BOJ to raise its rate to 1.25% by year-end.
Sources: CNBC, Investing.com, InvestingLive
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