#WhoIsNextFedChair Japan Pauses Rate Hikes — Market Reaction Unfolds
As widely anticipated, Japan has paused further interest rate increases. The Bank of Japan (BoJ) announced its first policy decision of 2026, keeping the benchmark interest rate unchanged at 0.75%, in line with market expectations.
Following the announcement, the Nikkei 225 edged slightly higher, while the US dollar strengthened modestly against the Japanese yen.
Looking back, the BoJ raised rates by 25 basis points in December, signaling that it would continue adjusting its accommodative stance if conditions allowed. In its latest outlook report, the central bank reiterated that future rate hikes remain possible if economic growth and inflation trends align with projections.
Inflation remains elevated. Japan’s average core CPI is forecast to rise by 3.1% in 2025, staying well above the central bank’s 2% target. December’s year-on-year core CPI reading also stood at 2.4%. However, policymakers expect inflation momentum to cool, with core CPI potentially falling below 2% in the first half of 2026.
Beyond interest rates, investors are closely monitoring Japanese government bond (JGB) yields, which have climbed sharply in recent weeks. Market attention is now on whether the BoJ will step in to stabilize the bond market.
According to analysis from CICC, Japan’s long-term interest rates are still below inflation levels, making the recent rise unsurprising. If yields increase too aggressively, the BoJ may temporarily purchase bonds to calm the market, and foreign exchange intervention cannot be ruled out. From a fundamentals perspective, higher inflation has actually improved Japan’s fiscal position, with the government benefiting the most. As a result, there is currently no urgent reason to be overly concerned about JGB risks.
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