Japan’s central bank keeps rates steady, delivers hawkish signal as government props up yen

On July 31, the Bank of Japan (BOJ) maintained its short-term interest rates at 1 per cent, but expressed concern that underlying inflation could surpass its 2 per cent target. This marked the first time the BOJ had issued a "hawkish" signal, hinting at potential future rate hikes. The central bank also pointed to inflationary pressures from strong global demand for artificial intelligence (AI), while noting that concerns over the economic impact of the Middle East conflict were diminishing.

BOJ Governor Kazuo Ueda emphasized the need to closely monitor upside price risks, stating that the bank would scrutinise such risks in its upcoming policy meetings. Despite keeping rates steady, the BOJ's hawkish statement led to an increase in the yield of two-year Japanese government bonds and only a slight improvement in the yen's value, which was trading around 160.760 per US dollar.

The BOJ revised down its core inflation forecast for the current fiscal year to 2.5 per cent from 2.8 per cent, due to stabilising oil prices, but raised its forecast for fiscal 2027. The bank also highlighted that while economic outlook risks were balanced, price risks were skewed to the upside, citing the rise in semiconductor and other durable goods prices as a likely factor.