The Bank of Japan (BOJ) kept rates on hold this month. After raising the benchmark rate to 0.75% last month to the highest level in 30 years, it opted to pause this month. The move aligns with market expectations. With political uncertainty rising ahead of an early general election in February, the decision appears to reflect a judgment that time is needed to assess the impact of last month's rate hike.
The Bank of Japan held its policy meeting on the 23rd and decided to keep the benchmark rate at 0.75%. While rates were left unchanged, they remain the highest since 1995. The decision was not unanimous among policy board members. Policy Board Member Takata Hajime issued a dissent, arguing for back-to-back rate hikes.
In its economic and price outlook released that day, the Bank of Japan raised its consumer price inflation forecast for the 2025 fiscal year (April 2025–March 2026) to 2.2% from 2.0%. It also reaffirmed its willingness to raise rates further if prices move as expected.
Experts said this month's hold reflects complex political and economic calculations. Prime Minister Sanae Takaichi will hold an early general election on the 8th of next month. Takaichi said on the campaign trail ahead of the early election that she would "temporarily suspend the consumption tax on food." The aim is to support households suffering from high inflation. The tax cut plan amounts to 5 trillion yen (about 45 trillion won).
When the government cuts taxes and pumps money into the economy, prices tend to rise. In this situation, if the Central Bank raises rates to curb inflation, it could clash with the tax cut policy and fuel market turmoil. Bloomberg said, "With Prime Minister Takaichi's tax cut pledge roiling the Government Bonds market, the Bank of Japan took a cautious stance to avoid political backlash." Immediately after the rate hold was announced, the yen weakened to as low as 158.74 per dollar.
The Bank of Japan has set "price increases" as a goal to escape decades of deflation (falling prices amid economic stagnation). But after raising rates last month to the highest level in 31 years, it faced an unexpected situation as voters complained of soaring living costs. Excluding fresh food, Japan's consumer price inflation last month was 2.4%, exceeding the Bank of Japan's 2% target for the fourth straight year.
Experts predicted the Bank of Japan will watch for the conclusion of political events such as the general election. Bloomberg said, "The Bank of Japan will decide its next move by comprehensively considering the impact of the December rate hike on the economy and prices, inflationary pressures from the weak yen, and the election results."
Some said that if the yen weakens further, the Bank of Japan could move to raise rates sooner than expected to curb rising import prices. According to Bloomberg, BOJ officials noted that "additional yen weakness could accelerate the pace of rate hikes."