Bank of Japan Keeps Key Interest Rate at 1%, Raises Economic Growth Forecast to 0.6%

▲ Bank of Japan

Japan's central bank, the Bank of Japan, maintained its benchmark short-term policy rate at "around 1%" at its monetary policy meeting today (31st).

According to the Nihon Keizai Shimbun (Nikkei) and Kyodo News, the Bank of Japan decided to freeze the interest rate by a majority vote of policy members during the two-day monetary policy meeting that concluded today.

Among the nine policy members, including Governor Kazuo Ueda, Hajime Takata was the sole dissenting member, reportedly proposing a 0.25 percentage point rate hike.

Previously, at its meeting last month, the Bank of Japan raised the key interest rate by 0.25 percentage points from "around 0.75%" to "around 1%" amid instability in the Middle East and inflationary pressures.

As a result, Japan's benchmark interest rate remains at its highest level in 31 years, since September 1995.

The market had widely anticipated the rate freeze for this month as a foregone conclusion.

Kyodo News reported that within the Bank of Japan, a growing view suggests that the economic blow from Middle East instability has been smaller than expected in April, while demand related to artificial intelligence (AI) is strongly bolstering the economy.

However, the Bank of Japan is closely monitoring the potential impact on economic conditions from the ongoing difficulties in reaching a ceasefire agreement between the United States and Iran, as well as the strong earthquake that struck Kumamoto Prefecture on the 28th.

Analysts also noted that selling pressure on the yen is growing due to expectations that the interest rate gap between the U.S. and Japan will not narrow significantly, as strong forecasts persist that the U.S. Federal Reserve will raise benchmark interest rates within the year.

In its "Outlook for Economic Activity and Prices" report released today, the Bank of Japan revised its real gross domestic product (GDP) growth forecast for fiscal 2026 upward to 0.6%, a 0.1 percentage point increase from its April projection of 0.5%.

The GDP growth forecast for fiscal 2027 was also raised by 0.1 percentage points to 0.8%.

Meanwhile, the inflation rate projection for fiscal 2026, excluding fresh food, was adjusted down by 0.3 percentage points from the April forecast to 2.5%.

The inflation rate for fiscal 2027 was revised upward by 0.1 percentage points to 2.4%.

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

(Photo: Yonhap News)

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