Bank of Japan keeps benchmark interest rate steady as it treads cautiously

At the end of a two-day meeting on Friday, the Bank of Japan held its benchmark interest rate steady at “around 0.25%,” the highest rate since 2008.

Although this decision is consistent with Reuters poll estimatesEconomists mostly expect another rate hike before the end of the year.

The ruling comes as the Bank of Japan seeks to normalize monetary policy without damaging the Japanese economy after a long period of ultra-loose policies.

Japan's economy recovers moderately, The central bank said in an official statementwhile acknowledging that “partially saw some weaknesses.”

The report noted that as the virtuous cycle from income to expenditure gradually strengthens, the economy will continue to grow “above potential growth rate.”

The Bank of Japan said the country's core inflation rate, which excludes fresh food prices, will rise in fiscal 2025.

Japan's fiscal year runs from April 1 to March 31, which means fiscal year 2025 will end in March 2026.

Japan's 10-year government bond yield fell 0.4 basis points, while the yen was almost unchanged at 142.52 to the dollar. After the decision was announced, the Nikkei 225 index rose 2% and remained at the same level.

Bank of Japan Governor Kazuo Ueda said last month If the economy and inflation are in line with the central bank's forecasts, the central bank will continue to raise interest rates.

The tightening stance makes the Bank of Japan an outlier at a time when most central banks around the world are turning to easing policy. On Thursday, the Federal Reserve cut interest rates by 50 basis points to 4.75% to 5.0%.

The Bank of Japan has long kept interest rates near or below zero as it attempts to stimulate inflation and boost economic growth through massive monetary stimulus.

Stefan Angrick, associate director at Moody's Analytics, told CNBC that the central bank is expected to raise interest rates in October and “further reduce monetary support this year despite poor economic data.”

“At best, raising interest rates will further drag down economic growth. At worst, raising interest rates could trigger a broader economic recession,” he said.

The central bank abandoned negative interest rates in March and raised the key rate to 0.25% in July as it believed the economy was on track to achieve its 2% inflation target.

Japanese core consumer price index Year-on-year growth was 2.8%, in line with Reuters forecasts, after rising 2.7% last month. Excluding fresh food and energy costs, inflation rose 2.0% from 1.9% the previous month.

This is the fourth consecutive rise in inflation, providing room for the Bank of Japan to continue tightening monetary policy.

Japan Lower second-quarter GDP growth The annualized growth rate fell to 2.9% from the previous quarter. The degree of economic recovery was lower than the government's initial estimate and fell short of the 3.2% growth forecast in a Reuters survey.

The Bank of Japan's rate decision comes a week before the Liberal Democratic Party leadership election on September 27, with the winner expected to be the new prime minister in early October.