Bank of Japan holds rate at 1.25% as all BOJ and Fed dissenters seek hikes

The Bank of Japan (BOJ) left its policy rate unchanged at 1.25% on October 30 in an 8-1 decision. Board member Hajime Takata opposed the decision and proposed a rate of 1.5%. The board rejected Takata's proposal by majority vote. Every policymaker who dissented at the BOJ and the US Federal Reserve this week favored higher rates. The Bank of Canada instead implemented an increase.

The BOJ statement said Takata considered underlying inflation to have reached the 2% target, putting monetary policy in a new phase. Takata argued that the BOJ should move rates toward neutral more quickly to preserve the ability to respond flexibly. Toichiro Asada and Ayano Sato supported leaving rates unchanged on Friday. Both members had opposed September's increase because the data did not warrant higher rates.

The BOJ outlook assessed underlying inflation as broadly consistent with the 2% target. The BOJ increased its fiscal 2027 core inflation projection from 2.4% to 2.6% and identified upside price risks. Japan's September core inflation exceeded 2% for the first time in nine months. The board unanimously approved more than doubling the pace of ETF sales beginning in January 2027.

Markets are focusing on December as the opportunity for the next rate change. A Reuters poll earlier this month found that 54 of 78 economists anticipated an increase to 1.5% this quarter. Most of those economists selected the December meeting.

The BOJ announcement followed the Washington and Ottawa rate decisions by two days. Inflation worries influenced both earlier decisions. The Fed retained its target range of 3.75% to 4% on October 28 in a 10-2 vote. Governor Lisa Cook and Cleveland Fed President Beth Hammack favored a quarter-point increase. The Fed paused one month after raising rates in September. The Fed described inflation as elevated and said additional data would inform the next policy decision. Traders expect an increase in December, with CME FedWatch assigning a 74.9% probability after the announcement.

The Bank of Canada raised its policy rate to 2.5% on October 28, marking the first increase since July 2023. The bank attributed CPI inflation near 3% since April to high oil prices. The bank projected inflation of about 3.5% by year-end. The bank's press release said further rate increases could be necessary, but uncertainty led the Governing Council to favor caution.

The Fed and the Bank of Canada will announce decisions on December 9. The BOJ will meet on December 17 and 18. Oil prices may determine how many of the December meetings produce rate increases.