Bank of Japan Raises Growth Forecasts, Holds Interest Rate at 0.75% Ahead of Snap Election

Bank of Japan on Friday raised its economic growth forecasts for the next two fiscal years while keeping its key policy interest rate unchanged at 0.75 per cent, as Japan prepares for a snap general election scheduled for February 8.

In its latest outlook, the central bank upgraded its growth forecast for the 2025 fiscal year to 0.9 per cent, up from 0.7 per cent projected in October, and revised its estimate for fiscal year 2026 to 1 per cent, also from 0.7 per cent.

The BOJ said it expects the Japanese economy to grow at a moderate pace as overseas economies recover, supported by government economic measures and accommodative financial conditions. It also pointed to a developing virtuous cycle between rising wages and prices as a key driver of domestic demand.

The decision to keep rates steady followed a split 8–1 vote on the policy board. The bank disclosed that board member Hajime Takata proposed raising the benchmark rate to 1 per cent, citing upside risks to inflation, but the motion was rejected.

Inflation Outlook and Policy Normalisation

In its statement, the BOJ reiterated that inflation is expected to fall below its 2 per cent target during the first half of the year. Data released earlier on Friday showed Japan’s headline inflation at 2.1 per cent in December, the lowest reading since March 2022, though still above the central bank’s target for the 45th consecutive month.

Japan began its policy normalisation process in March 2024, ending the world’s last negative interest rate regime. The BOJ has repeatedly stressed that further rate increases will depend on the sustainability of wage growth and price momentum.

Despite the central bank’s gradual tightening, Japanese government bond yields have climbed to multi-decade highs in recent weeks, contributing to capital outflows and renewed weakness in the yen. The BOJ noted that real interest rates remain negative, while fiscal concerns continue to weigh on markets.

Political Pressure Ahead of Elections

The policy decision comes amid growing political scrutiny ahead of the snap election, which could see Prime Minister Sanae Takaichi intensify calls for looser monetary policy and additional fiscal support to stimulate growth.

Japan’s economy contracted more sharply than initially estimated in the third quarter, shrinking 0.6 per cent quarter-on-quarter and 2.3 per cent on an annualised basis, adding to pressure on policymakers.

Takaichi has outlined plans for a record ¥115 trillion ($783 billion) budget for the next fiscal year beginning April 1, following a ¥20 trillion ($135 billion) stimulus package introduced last year to offset rising living costs.

Yen Weakness Draws Official Warnings

The yen has weakened sharply against the dollar, falling about 4.6 per cent since late October to around 158.97, prompting concerns from government officials.

Finance Minister Satsuki Katayama has warned against what she described as “one-sided” currency movements, saying she has conveyed Japan’s concerns to U.S. Treasury Secretary Scott Bessent. She added on Friday that bond market volatility appeared to have eased but said authorities were monitoring financial markets with a “high sense of urgency”.

Analysts at ING said markets would closely scrutinise comments from BOJ Governor Kazuo Ueda, particularly on how recent yen weakness could affect inflation dynamics.

Prime Minister Takaichi is expected to dissolve Japan’s Lower House later on Friday, formally triggering the snap election.