The Bank of Japan kept its policy rate at 1 % following its July 30-31 meeting, the highest level in over 31 years, after raising it from 0.75 % in June. Inflation reached 1.7 % year-on-year in June 2026 while GDP growth is projected at just 0.6 % for the current fiscal year, creating a major tension between fighting rising prices and protecting a stagnant economy. The current inflation, primarily driven by yen weakness and rising energy prices, represents cost-push inflation that squeezes household budgets without signaling robust domestic demand. Former BOJ board member Makoto Sakurai warns that inflation could climb to approximately 3.5 % by autumn 2026 if the central bank does not act more aggressively. The BOJ must navigate significant constraints: a fragile economy, one of the highest government debt-to-GDP ratios among developed economies, and a massive balance sheet normalization process.
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