BOJ and Possible Rate Change. Updated May 30, 2026.

 

BOJ leaves policy rate unchanged at 0.75%, sharply raises inflation outlook

Ideas

The Bank of Japan, as expected decided to not increase the rate due to Middle East situation and the fact the BOJ is very conservative and doesn't want to cause harm to the Japanese economy with unwanted or unneeded side affect and or course doesn't want to upset the financial markets in Japan or globally.

And then there is the unspoken or understanding, whether good or not so good that the current Prime Minister is fiscal dove and would prefer to see the key interest rate to be decrease or less than it, which while not saying so directly, might be part of the BOJ's decision not to increase the key rate.

Inflation in Japan, almost since the pandemic has continued to increase which of course has put a lot of stress on Japanese households and forced them to cut-back on many things and or course reduce their spending in the economy.

The Japanese economy only estimated to grow 0.5 percent is not a surprise as a 1.0 percent projected growth might have been a little too optimistic as the Japanese economy just doesn't grow that much these days.

And the fact that three of the BOJ policy makers are somewhat hawkish just shows that there is never a consensus to do one thing and there are always some for and some against increasing the key rate to try and reduce inflation in the Japanese economy.

Increasing the key rate, has both positives and negatives as an increase can in theory be an incentive to reduce process but at the same time, if the inflation is due to companies passing-on their costs due to increased energy costs, increased labor costs, or increased raw materials costs, companies are going to be very reluctant to lower their prices even though Japanese households and or consumers have cut back on their spending.

If inflation is only due to an increase in consumer spending, then yes the increase in the key rate most likely will stem the increase in spending by consumers and might reduce the inflation rate some over time as needed.

Yes, potentially the increase in crude oil prices as for example both South Korea and Japan will be the most affected and their need for oil from that region is about 49 percent of their energy needs which means they are two most vulnerable countries affected by the Middle East situation now.

And as noted, due to global logistics systems now being very interconnected its not just energy but a host of other products and services that are being affected by the situation and it doesn't look like its going to end any time soon, which means both South Korea and Japan will continue to have challenges with their economies.

Companies whether good or not so good, usually these days don't wait until something happens to increase prices and they will be very proactive and increase as a way to try and protect their profits margins from future challenges and this is a perfect example of companies increasing prices ahead of any prices increases due to due logistics or energy companies increasing their prices. 

Again, both Japan and South Korea are the two most vulnerable countries as both are relatively resource-poor countries which means they have to import much of what they need including most if not all of their energy needs.

The BOJ, as expected likes to be positive and the ideas that inflation will be reduced to the target rate of 2.0 percent inflation might be true, but a lot can happen between now and the end of 2028, with all kinds of challenges, both domestic and globally, could disrupt the idea that inflation will actually be less than 2 percent in two years from now.

And again, while an GDP growth projection of 0.7 percent is about right but again its way to early to know just what is going to happen as again there are just too many variables both positives and negative and unfortunately, as least lately, the negatives have had more affect on the economy than the positives.

Core consumer prices may increase to 2.3 percent in fiscal 2007 but there is no real guarantee that they might increase more or less as inflation, again, has increased almost since the pandemic and has continued to increase each month and each year since then.

To be fair, BOJ watchers like to think the key interest rate is going to be increased in the coming months but the BOJ is a very conservative group even though some members are somewhat hawkish meaning they want to see a rate increase but so far the dovish type board members have been able to keep the rate stable or from not being increased but of course that could change but its hard say just yet as there are just too many variables, domestically and globally, that would upset any desire to increase the key rate.

The BOJ always vows to increase the rate but it rarely does as it knows there are just too many negative variables preventing them from doing it. And even this time, with the Middle East situation affecting most if not all economies, the BOJ just might be trying to keep the markets calm and not trying to upset them too much.

And yes, the yen might have increased some but it's still very weak which can be both a positive and negative depending which side of the coin you are on. as a weak yen helps exporters but hurts importers and ultimately hurts companies in Japan and Japanese consumers. 

And again, the BOJ and Ueda might have good intentions or the desire to increase the key rate to try and reduce inflation but due to the Middle East situation there are now just too many variables that could disrupt the Japanese economy with the increase in prices related to energy price increases, price increases of other products coming from the Middle East and disruptions in global shipping and logistics systems around the world.

Yes, cost-push which is essentially companies passing-on their increased costs to the next in the supply chain including the final retail customer is the main challenge now for the Japanese economy.

Wage increases which increases a company's profit margin is not the main factor, as for example it is estimate that only 30 percent of the Japanese workforce work for the large name-brand companies but instead work for the small and mid-size companies that makeup most of the economy and many of the small and mid-size companies just don't have the resources to increase wage as much as the large companies.

As far as domestic demand is concerned it is estimated that consumer spending is only about 50 percent of Japan's GDP which, in itself is just not enough to help the economy grow as it needs to be at least 60 percent of GDP to see real growth.

Also an key rate increase could potentially cool economic growth as there will just be too many side affects affecting the economy and the Japanese economy is just not strong or robust enough to handle key rate increase at this time, even inflation is well above the 2 percent target that the BOJ wants to see.

In recent days, here in late May, the Japanese yen has fallen even further which is some consider to be too weak and is not inline with the rest of the major currencies globally.

Yes, import prices, in resource poor Japan is going to be even higher than what importers or wholesalers want or need, which means they are going to pass-on their increased costs to the next in the supply chain including the final retail customer.

Japan most likely will follow the US Federal Reserve, which is to keep its rate steady and Japan will follow the same thing due the Middle East situation and the strait or Hormuz being still closed which means the flow of oil and products from the Middle East will be constraint for the time being.

Have a nice day!

Article source:   https://mainichi.jp/english/articles/20260421/p2g/00m/0bu/002000c