Bank of Japan holds benchmark interest rate at 1%

The Bank of Japan held its benchmark short-term policy rate at "around 1%" at a monetary policy meeting Friday.

A majority of the central bank's policy board members voted to keep rates unchanged at the two-day meeting that began Thursday, according to local media including the Nikkei.

Of the nine policy board members, including Governor Kazuo Ueda, only Hajime Takata dissented, reportedly calling for a 0.25-percentage-point rate hike.

At last month's meeting, the Bank of Japan raised its benchmark rate by 0.25 percentage points from "around 0.75%" to "around 1%" amid Middle East instability and inflationary pressure — pushing Japan's benchmark rate to its highest level since September 1995. Friday's decision keeps it at that 31-year high.

The hold was widely anticipated by markets. Kyodo News had earlier reported that sentiment within the Bank of Japan was shifting toward the view that the economic damage from Middle East tensions had proven smaller than feared in April, and that AI-related demand was providing a strong boost to the economy.

However, the Bank of Japan is closely watching developments after the United States and Iran, having engaged in ceasefire negotiations last month, resumed military exchanges this month. Officials are also monitoring the aftermath of a powerful earthquake that struck Kumamoto Prefecture on Tuesday.

Growing expectations that the Federal Reserve will raise its benchmark interest rate before year-end — which would keep the rate gap between the United States and Japan wide — are also seen as a key factor in the Bank of Japan's policy deliberations, as the prospect fuels selling pressure on the yen.

Meanwhile, in its Outlook for Economic Activity and Prices report released Friday, the Bank of Japan revised up its real GDP growth forecast for fiscal year 2026 to 0.6%, up 0.1 percentage points from the 0.5% projected in April. The fiscal 2027 GDP growth forecast was also raised by 0.1 percentage points to 0.8%. The bank lowered its fiscal 2026 inflation forecast, excluding fresh food, by 0.3 percentage points to 2.5% from its April projection, while raising the fiscal 2027 inflation forecast by 0.1 percentage points to 2.4%.

In the report, the Bank of Japan warned that underlying inflation could overshoot its 2% price stability target.