Bank of Japan holds rate at 1.25%, keeps December hike in play

The Bank of Japan kept its short-term policy interest rate unchanged at 1.25% on Friday, October 30, 2026, at the end of a two-day meeting in Tokyo, as markets had expected. The decision was taken by an 8-1 vote, with board member Hajime Takata proposing an increase to 1.5%. The central bank raised its inflation forecast, said it stands ready to keep raising borrowing costs, and announced that it will step up sales of the exchange-traded funds (ETFs) it bought during years of stimulus.

For most of the past 25 years, Japan had interest rates at or below zero as the central bank tried to lift prices out of a long period of deflation, when prices fall rather than rise. That era is ending. The Bank of Japan has been raising rates step by step, and its statement that underlying inflation has reached 2% is the clearest sign yet that it believes the economy no longer needs emergency support. Underlying inflation strips out volatile items such as fresh food and energy to show the steady trend in prices.

A hold with one vote for a hike, a higher inflation forecast and a promise to keep tightening is what economists call a "hawkish hold": no change now, but a strong hint of an increase soon. Markets read the meeting as keeping a December rise firmly on the table. Governor Kazuo Ueda has said the bank will adjust policy promptly to keep inflation near its target.

The ETF decision matters too. During its long stimulus, the Bank of Japan bought large amounts of shares through ETFs, funds that track a stock index, to support the market. Selling more of them each year is part of slowly unwinding that support. The bank has chosen a gradual pace, which limits the risk of unsettling Japanese share prices.

For the world, and for India, Japanese interest rates matter more than their size suggests. For years, investors borrowed cheaply in yen and invested the money in higher-yielding assets abroad, including emerging markets. When Japanese rates rise, that trade becomes less attractive and money can flow back to Japan, moving currencies and share markets elsewhere. A stronger yen also affects Indian companies that trade with Japan or borrow in yen.

Short-term: The yen gained against the dollar after the decision, and traders will focus on the December meeting, where a rise to 1.5% is widely expected. Japanese bond yields and bank shares tend to move with these expectations.

Long-term: If the Bank of Japan keeps raising rates, Japan's long period of almost free money will be over, changing how Japanese households save, how companies borrow and how global investors use the yen.

Who is affected: Japanese borrowers and savers; companies that import or export with Japan; global investors who borrow in yen; and emerging markets, including India, whose currencies and share markets can move when money flows back to Japan.

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