Bank of Japan Maintains Interest Rate at 1%, Warns Inflation May Exceed Target
The Bank of Japan has decided to maintain the policy interest rate at 1%, with no increase.
The decision was passed with a vote of 8 to 1, with one committee member proposing to raise the rate to 1.25%; at the same time, it warned that core inflation could significantly exceed the 2% target starting in the second half of the 2026 fiscal year, and reiterated that it will continue to raise interest rates to prevent exceeding the target from adversely affecting the economy.
In the market, event-driven funds are being repriced: the yen has attracted buying interest due to strengthened rate hike expectations, leading to increased pressure on carry trades; Japanese government bond yields are under upward pressure, export-related stocks and high-leverage carry assets are under pressure, while domestic fixed income and long positions in the yen benefit.
Source: Public Information
ABAB AI Insight
Since exiting negative interest rates in March 2024, the Bank of Japan has raised rates five times, bringing the rate to 1% in June 2026 (the highest since 1995). This time, it remains unchanged but emphasizes the risk of exceeding the target, continuing the path from ultra-loose to gradual normalization, having previously revised inflation risks upward due to oil prices and yen depreciation.
On the capital front, the central bank is compressing the degree of easing by continuously raising the policy interest rate, pushing the wage-price spiral towards a sustainable 2%, while reducing reliance on government bond purchases; the motivation is to prevent inflation from deviating and being forced to rise sharply, strategically reallocating resources from asset bubbles and export subsidies to rebuilding domestic demand pricing power.
In comparison to the Federal Reserve's rapid shift from zero interest rates in 2022-2023 to curb excess: Japan is currently in the mid-stage of normalization, similar to the European Central Bank's cautious rate hikes after exiting QE, shifting the industry position from defending against deflation to actively managing upward risks.
Essentially, this is a change in regulation and a shift in pricing power: after wage transmission and rising import costs elevate underlying inflation, the central bank is forced to lock in the upward channel early, with the mechanism being the failure of expectation anchoring under a fixed supply monetary framework, forcing the policy interest rate to become the new pricing anchor.
ABAB News · Cognitive Law
The central bank's warning of exceeding the target is the true beginning of rate hikes.
The old easing will not suddenly disappear, but will be gradually priced in.
Inflation exceeding the target risk = wage transmission × exchange rate depreciation