The Bank of Japan kept its short-term policy rate at 1.25% on Friday in an 8-1 vote, raised its inflation forecast for next fiscal year and said it would keep lifting borrowing costs. It also surprised investors by more than doubling the pace at which it will sell its holdings of exchange-traded funds.

For investors in Asia, the message is that Japan's tightening cycle has further to run. The board judged that underlying inflation is now broadly consistent with its 2% target, a shift that several analysts said keeps a hike at the Dec. 17-18 meeting in play.

Board member Hajime Takata voted against the hold and proposed raising the rate to 1.5%. He argued that with underlying inflation at the target, policy had entered a new phase in which the bank should move faster toward the neutral rate, according to the statement. His proposal was defeated.

The decision, released at 12:02 p.m. Tokyo time, matched expectations set out in Capital Times' preview of the meeting. The BOJ raised the rate to a 31-year high in September, Reuters reported. Governor Kazuo Ueda was due to explain the decision at a news conference starting at 3:30 p.m. Tokyo time (2:30 p.m. HKT).

Bank of Japan raises its inflation forecast

In its quarterly Outlook Report, the board lifted its median forecast for core consumer prices, which exclude fresh food, to 2.6% for fiscal 2027, from 2.4% in July. It kept the fiscal 2026 forecast at 2.5% and fiscal 2028 at 2%. The bank cited factors such as the rise in crude oil prices since the summer.

Growth forecasts barely moved. The board now sees real GDP rising 0.7% in fiscal 2026, up from 0.6%, and 0.7% in fiscal 2027, down from 0.8%. It expects inflation to accelerate to a level clearly above 2% before easing back toward 2% in the second half of the projection period as the oil shock fades. Its projections assume Dubai crude falls from around $105 a barrel to around $70 toward the end of that period, based on futures prices.

The forecasts leave out the proposed temporary cut in the consumption tax on food and beverages now before the Diet. The bank estimated that the cut, if applied to all items in the government's September tax outline, would subtract about 1.3 percentage points from fiscal 2027 core inflation.

Price data released hours before the decision pointed the same way. Core consumer prices in Tokyo rose 2.6% in October from a year earlier, in line with the median market forecast, after 2.7% in September, Reuters reported.

Faster ETF sales surprise markets

The board voted unanimously to raise its ETF sales to about 860 billion yen a year at book value from January 2027, up from about 330 billion yen. That works out to about 0.1% of stock market trading value, double the earlier ratio, and about 2.46 trillion yen a year at market prices. At the new pace, the bank estimates it would take about 43 years to sell its holdings, down from about 112 years. Sales of J-REITs stay at about 5 billion yen a year.

Masato Koike, senior economist at Sompo Institute Plus, told Reuters the change was a surprise but small enough to be absorbed over time. Tohru Sasaki, chief strategist at Fukuoka Financial Group and a former BOJ official, questioned the timing given the risk-off mood in markets.

Hikes ahead as risks tilt to the upside

The Outlook Report said the bank "will continue to raise the policy interest rate" and adjust monetary support as conditions allow. It named the Middle East, AI-related demand and exchange rates as the main risks. It described risks to prices as skewed to the upside, warning that inflation expectations could rise and push underlying inflation above target. With labor shortages acute, it expects base pay increases at around the same level as in 2025.

The bank also said currency moves are now more likely to feed through to prices than in the past, because firms have become more willing to raise wages and prices. It noted that many central banks, including those in the United States and Europe, have shifted toward raising rates since the summer. The Federal Reserve held rates on Oct. 28.

Most analysts saw a hawkish tilt despite the hold. Kazutaka Maeda of Meiji Yasuda Research Institute told Reuters the BOJ may now be weighing hikes every three months rather than every six, making December credible. Shoki Omori of Deutsche Securities said the shift moves the debate "from when the next hike comes to where the policy rate stops." State Street Investment Management's Masahiko Loo said his base case for the peak rate is around 1.75%.

Markets were already under pressure from a selloff in technology shares. The yen strengthened to 157.115 per dollar after the decision, Reuters reported, and stood near 157.50 by early afternoon in Tokyo, according to Trading Economics data. The 10-year Japanese government bond yield was down about 5 basis points at 2.79% at that point, near its lowest in nearly three months, the same data showed.

The Nikkei 225 fell as much as 3% in the morning on chip stocks, led by Advantest and Tokyo Electron, Reuters reported. A contract tracking the index was down about 2.2% at around 63,200 in early afternoon trade, according to Trading Economics.

The full Outlook Report is due on Monday, Nov. 2, and a summary of board members' opinions on Tuesday, Nov. 10, ahead of the December meeting.