Source: Sharecast
The central bank kept its benchmark short-term policy rate at 0.75%, in line with consensus. However, the vote was not unanimous, with three of the nine-member board voting for a rise to 1.0%, in response to mounting inflationary pressures.
The last time there was such a large dissenting vote was in 2016.
The BOJ also revised its inflation forecasts sharply higher and warned that economic growth was likely to slow in the current fiscal year.
Along with many other Asian countries, Japan is heavily reliant on imported energy. But war in the Middle East has sent global energy prices soaring, reigniting inflation risks and weighing on economic growth.
The BOJ now expects its core measure of inflation, which excludes fresh food, to reach 2.8% in the year to March 2027. That is noticeably higher than its previous forecast for 1.9%, which it made in January, before the outbreak of war.
It said: "The rise in crude oil prices reflecting the impact of the situation in the Middle East is expected to push down corporate profits and households’ real income."
Stephen Innes, managing partner at SPI Asset Management, said: "The policy rate stayed pinned at 0.75%, yet everything around that decision shifted. Inflation forecasts were raised aggressively, growth was cut and more importantly, the board’s internal balance is starting to turn.
"The yen strengthened, while bond futures rolled over. That is the market catching up to something it had been under-pricing into the event - the growing probability that the BOJ is edging closer to tightening, even it is not ready to move yet."
Lee Hardman, currency analyst at MUFG, said: "While today’s hawkish hold from the BOJ has helped to provide support for the yen, it is unlikely to trigger a sustained reversal of the bearish trend that has been in place since the Middle East conflict started.
"The yen has been one of the worst performing G10 currencies during the conflict; the combination of a still buoyant global investor risk sentiment alongside the deterioration in Japan’s terms of trade have encouraged a weaker yen."