BOJ Keeps Rates Unchanged, Signals Rate Hikes Amid Rising Inflation

The Bank of Japan held its policy rate at 1% on July 31 in an 8 to 1 vote, with board member Takata dissenting in favor of an immediate move to 1.25% . The hold was expected. The signal accompanying it was not: for the first time the BOJ warned that underlying inflation could run clearly above its 2% target from the second half of fiscal 2026, citing wage momentum, oil prices, and a persistently weak yen.

The data underneath supports the hawkish shift. Tokyo core CPI accelerated to 1.9% year over year in July from 1.6% in June, above the 1.7% consensus. The yen weakened around 0.15% to 0.20% after the decision, with the dollar moving back toward 160.37 yen. That move is best read as a give-back of gains from a Ministry of Finance intervention the previous day, which had briefly pulled the currency off four-decade lows, rather than as a fresh yen rally.

The inflation impulse is not confined to Japan. Eurozone flash inflation accelerated to 2.9% in July from 2.8% in June, with energy prices up 10.0% year over year against 8.5% previously, services at 3.3%, and core at 2.5%. Two of the three major developed-market central banks are therefore facing a re-accelerating energy-driven print at the same time.

For markets the live question is timing. A BOJ that has explicitly flagged an above-target inflation path has effectively put a rate increase on the table for the autumn meetings, which could compress the carry trade that has funded a meaningful share of global risk positioning. Watch the October outlook report, wage negotiation guidance, and whether Japanese authorities intervene again if the yen retests recent lows.

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