A guide sign reading “Bank of Japan” is seen in Tokyo on July 31, 2024.
Kazuhiro Nogi | Afp | Getty Images
Japan’s central bank on Friday raised economic growth forecasts while holding its key policy rate at 0.75% as the country prepares to go into an election.
The Bank of Japan upgraded its economic growth forecast for the fiscal year ending in March 2026 to 0.9% from 0.7% in October 2025, and also raised its GDP expansion outlook for the 2026 fiscal year to 1% from 0.7%.
The central bank kept the benchmark interest rate steady in a split 8-1 decision, after raising it to the highest level in 30 years last December, ahead of snap polls that could see Prime Minister Sanae Takaichi sharpen her advocacy for monetary easing and fiscal support.
Japan embarked on the path to policy normalization in March 2024, abandoning the world’s last negative interest rate regime, and has stressed on raising rates subject to a virtuous cycle of growth in wage and prices.
That policy, however, has come under political pressure with prominent names including Takaichi advocating for softer rates to fuel economic growth.
Separately, Japan released its December inflation figures, with headline inflation coming in at 2.1%, its lowest level since March 2022, but still running above the BOJ’s target of 2% for a 45th straight month.
Analysts from Dutch bank ING said before the rate decision that “the markets will closely listen to Governor Ueda’s assessment of how recent weakness in the JPY might affect inflation.”
Despite higher rates, Japan bond yields have been rising and have hit multidecade highs in recent days, driving capital outflows and weakening the yen. This comes as real rates still remain negative, according to the BOJ and fiscal worries have increased.
Takaichi had planned a record $783 billion budget for the next fiscal year, starting April 1, on top of a $135 billion stimulus package last year targeted at helping households with the rising cost of living.
Pressured by rising yields amid fiscal concerns, the yen has seen a significant decline against the dollar toward the end of last year, falling about 4.6% since Oct. 21, when Takaichi became prime minister to its current level of 158.97.
This weakness prompted finance minister Satsuki Katayama to warn against “one-sided” moves in the currency.
On Friday, Katayama reportedly said that the bond market rout has appeared to have receded, and that she was closely monitoring financial markets with a “high sense of urgency.”
Katayama reportedly told reporters in Washington last week that she has conveyed her “deep concern” over the depreciation in yen and Treasury Secretary Scott Bessent shared her view on “one-sided” weakness in the Japanese currency.
Takaichi is set to dissolve Japan’s Lower House later in the day, as Japan goes to polls in a snap election on Feb. 8.
Howe Chung Wan, head of Asian Fixed Income at Principal Asset Management, said in a note on Thursday that “Forward guidance should continue to point toward further rate hikes, though the BOJ is likely to be more cautious in communicating specific timing, particularly in light of the February elections.”
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