Bank of Japan holds rates at 1.25% but speeds up sales of its stock holdings
The Bank of Japan kept its key rate at 1.25% on Friday in an 8-1 vote, while unanimously deciding to more than double the pace at which it sells its exchange-traded fund holdings from January 2027. Figures checked at about 3:55 pm PKT on Friday, 30 October 2026.
The Bank of Japan kept its key short-term interest rate unchanged at 1.25% on Friday, closing a two-day policy meeting with a decision that markets had widely expected, but pairing the hold with a sharper step away from its era of extraordinary market support. Figures in this post were checked at about 3:55 pm Pakistan time on Friday, 30 October 2026.
The Policy Board voted 8-1 to maintain the uncollateralised overnight call rate at around 1.25%. Board member Hajime Takata dissented, proposing an increase to 1.5% on the argument that underlying consumer inflation had already reached the central bank's price stability target and that rates should move faster towards a neutral level. The majority rejected that proposal.
The decision followed two rate increases earlier in the year, in June and September. The September move, of 25 basis points from 1% to 1.25%, took the rate to its highest level since 1995, and it forms the backdrop to Friday's pause: the bank is no longer cutting or holding at rock-bottom levels, but it is also not rushing to tighten again in the same meeting cycle.
Alongside the rate decision, the bank released its quarterly Outlook Report and lifted its inflation forecast for the fiscal year starting in April 2027 to 2.6%, up from 2.4%. It also judged that underlying inflation, stripped of temporary factors, is generally consistent with its 2% price stability target and is likely to stay around that level, a reading that news coverage in Japan summed up as the bank judging that its long-sought 2% goal has been reached.
The bigger surprise for many market watchers was not the rate but the balance sheet. The bank unanimously approved a faster pace of selling the exchange-traded funds it accumulated during years of fighting deflation. From January 2027 it will sell ETFs at about 860 billion yen a year on a book-value basis, up from about 330 billion yen a year, a pace equivalent to roughly 0.1% of market trading value rather than about 0.05% before.
Put in market terms, the change is large. At the end of March the bank's ETF holdings carried a market value of around 94 trillion yen, roughly $597 billion. At the old pace, disposing of them would have taken about 112 years; at the new pace, the arithmetic shortens that to about 43 years. The bank said sales carried out since January 2026 had proceeded smoothly without a major impact on markets, while trading volumes had expanded, and it added that it could temporarily slow or suspend sales depending on financial market conditions.
Sales of Japan real estate investment trusts will stay unchanged at around 5 billion yen a year on a book-value basis. The distinction matters because the ETF programme, begun in 2013 as part of the fight against deflation, once made the central bank a buyer of Japanese equities on weak days. From January it will instead be a steady seller, removing a backstop that investors had grown used to over more than a decade.
Friday's meeting closed a week of central bank decisions. The United States Federal Reserve had kept its benchmark rate unchanged at 3.75% to 4% on Wednesday, and the European Central Bank had also held on Thursday. The Bank of Japan's hold therefore fits a global pattern of caution, but its ETF decision and its firmer language on inflation set it apart as a bank still moving, gradually, towards normalisation.
Markets reacted in the same nervous mood that has gripped much of Asia this week. Japan's Nikkei gauge fell 3% at one point during Friday's session, and at one stage dropped by more than 1,900 points, as technology shares sold off on doubts about the returns on heavy artificial intelligence spending. The yen was firmer, around 157.47 per dollar in Tokyo trade, while the yield on the benchmark 10-year Japanese government bond fell 5.5 basis points to 2.780%.
Attention now turns to Governor Kazuo Ueda's afternoon news conference and to the bank's next checkpoints: a summary of opinions in November, meeting minutes in December, and a further policy meeting in December at which markets are watching for hints of another rate increase. Whether that increase comes in December, in January, or later remains a possibility to weigh rather than a certainty, and it will depend on the inflation and wage data that arrive between now and then.
For savers and borrowers in Japan, the practical effects are slower but real. The September hike is only now reaching household accounts, with the country's three largest banks raising ordinary deposit rates to 0.5% from 2 November. The faster ETF unwind, meanwhile, changes the structure of the stock market itself, shifting the central bank from supporter to seller over the years ahead.
This post is market news information only, not financial advice.
