Bank of Japan holds rates at 1.25% but doubles pace of stock sell-off

The Bank of Japan left its benchmark interest rate unchanged at 1.25% on Friday, resisting a push from one of its own policymakers for a further increase, while announcing it will more than double the pace at which it sells off the enormous stock-fund portfolio it built up over more than a decade of crisis-era stimulus.

The decision, reached by an 8-1 vote of the Bank's nine-member Policy Board, came five weeks after the central bank had raised the rate to its current level. In its statement on monetary policy, the Bank said it would continue to guide the uncollateralized overnight call rate to remain around 1.25%. The lone dissenter, board member Hajime Takata, argued that underlying inflation had already reached the Bank's target and proposed raising the rate to 1.5% instead; his proposal was voted down by the rest of the board.

A Middle East-driven inflation puzzle

Alongside the rate decision, the Bank published its quarterly Outlook for Economic Activity and Prices, which found that Japan's economy is likely to keep growing only moderately through the current fiscal year, at a "decelerated rate," because higher energy and raw-material prices tied to the conflict in the Middle East are weighing on corporate profits and household income. The Bank expects that drag to be offset in part by resilient global demand for artificial-intelligence-related goods and by government measures to cushion households from higher energy bills, with growth picking back up from fiscal 2027 as oil's effects fade.

On prices, the Bank forecast that core consumer inflation, which excludes fresh food, will accelerate to "a level clearly above 2 percent" in the near term, as businesses continue passing wage increases through to the prices they charge, as crude oil costs feed through to energy and goods prices, and as the yen's depreciation and rising global demand for semiconductors push up the cost of durable goods. The increase is expected to ease back toward 2% in the second half of the three-year projection period. The Bank said the risks to that inflation outlook are "skewed to the upside," naming three factors it is watching most closely: the course of the war-driven disruption in the Middle East and its effect on oil supplies, the pace of global AI-related investment, and the direction of the yen.

• Policy rate held at 1.25%, unchanged since the Bank raised it at its September 18 meeting
• Vote: 8-1, with board member Hajime Takata dissenting in favor of raising the rate to 1.5%
• Core CPI forecast to run "clearly above 2 percent" near-term before easing toward 2% later in the projection period
• Pace of ETF sales to roughly triple, to about 860 billion yen a year from about 330 billion yen, starting in January 2027

Speeding up the unwind of a crisis-era stock portfolio

The Bank's board also voted unanimously to accelerate the sale of its holdings of Japanese equity exchange-traded funds, which it built up over years of unconventional monetary easing and began selling down only in January. It will now sell at a pace equivalent to about 0.1% of market trading value, roughly double the previous rate, lifting the annual sales figure to about 860 billion yen on a book-value basis from about 330 billion yen, with the faster pace taking effect in January 2027. Reporting by Nikkei Asia put the Bank's remaining ETF holdings at roughly $228.3 billion in book value as of October 20, and noted that the faster pace would still take an estimated 43 years to fully unwind the portfolio, down from about 112 years at the previous rate.

Friday's hold followed a more contested decision in September, when the board voted 7-2 to raise the rate for the first time in months, with two dovish members, Toichiro Asada and Ayano Sato, dissenting because they judged the economy was not yet strong enough to justify tightening. That September statement had described underlying inflation as "approaching 2 percent" and said the Bank would keep raising rates gradually depending on how conditions evolved. By October, Takata had shifted to arguing the opposite case: that with inflation already at target, the board needed to act "nimbly" and move faster toward a neutral rate, a proposal the rest of the board rejected as premature.

The decisions matter well beyond Japan. The Bank of Japan is one of the few major central banks still actively moving its policy rate higher this year, having only fully exited a decade and a half of near-zero and negative interest rates over the past two years, and its stock-market holdings, built up through years of ETF purchases meant to stimulate growth, remain the largest of any central bank's. A faster sell-down could tighten liquidity at the margin in Tokyo equity markets even as the Bank avoids outright rate increases, while a sustained overshoot of Japan's 2% inflation target would be felt most directly by households, whose wages have not always kept pace with the price increases the Bank's own Outlook Report anticipates. Exporters have generally benefited from a weaker yen, while the same currency weakness has pushed up the cost of imported energy and food that the government has tried to cushion through subsidies.

What happens next

Friday's decision came roughly a year into the tenure of Prime Minister Sanae Takaichi, Japan's first woman to hold the office, whose campaign rhetoric markets have generally read as favoring looser monetary conditions and tolerance for a weaker yen. The Bank's board gave no indication that political pressure shaped Friday's decision, and Governor Kazuo Ueda, at his post-meeting press conference, said Japan's 2% inflation target had been reached but not yet on a sustainable footing, according to Nikkei Asia's account of the briefing.

The Bank is scheduled to publish the full text of October's Outlook Report on Monday, an account of the board's internal discussion in its "Summary of Opinions" on November 10, and the detailed minutes of Friday's meeting on December 23. Economists will be watching those documents, along with December's meeting, for signs of whether Takata's dissent gathers support from other board members as the Bank weighs whether the inflation pressure building from oil prices, AI-driven demand and the weak yen proves durable enough to justify another rate increase, or whether, as the two dissenters in September argued, the underlying economy remains too fragile to tighten further.