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# BOJ Holds Policy Rate at 1.25%, Doubles Down on Balance Sheet Unwinding with Accelerated ETF Sales
- URL: https://www.fintechobserver.com/boj-holds-policy-rate-at-1-25-doubles-down-on-balance-sheet-unwinding-with-accelerated-etf-sales/
- Published: 2026-11-03T02:01:58.000Z
- Updated: 2026-11-03T02:01:58.000Z
- Author: Norbert Gehrke
- Tags: Economics, bank of japan, inflation, interest rates, etf

At its Monetary Policy Meeting concluded on October 30, 2026, the Policy Board of the Bank of Japan (BOJ) voted 8-1 to maintain its primary monetary policy setting, encouraging the uncollateralized overnight call rate to remain at approximately 1.25%. Concurrently, in an unanimous decision, the central bank authorized a structural acceleration of its balance sheet reduction by nearly tripling the annual disposal pace of its Exchange-Traded Fund (ETF) holdings from roughly 330 billion yen to 860 billion yen on a book-value basis. This operational adjustment accompanies a major macroeconomic milestone: the BOJ officially declared that underlying Consumer Price Index (CPI) inflation has reached a level generally consistent with its 2% price stability target and is projected to remain anchored around that level over the medium term.

![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/2026/11/Screenshot-2026-11-03-at-10.32.02.png)

This decision represents a deliberate, dual-track normalization strategy. By maintaining borrowing costs at 1.25%, the central bank preserves necessary monetary accommodation to support real wage growth and corporate liquidity against global growth headwinds and energy price shocks. Simultaneously, by aggressively stepping up the unwinding of non-conventional asset purchases, the central bank is actively dismantling its decade-long crisis-era intervention framework. This operational decoupling separates short-term interest rate management from legacy balance sheet contraction, allowing the BOJ to mitigate market distortion risks without delivering an overt shock to commercial borrowing costs.

While the majority of the board backed this calibrated approach, the single dissenting vote underscored a growing ideological division within the bank regarding the speed at which policy rates should reach neutral.

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## 1\. The Policy Board Split: Takata's Hawkish Dissent vs. The Board Consensus

The Policy Board's internal debate on October 29–30 exposed a critical strategic divide over how fast the central bank should adjust borrowing costs once underlying inflation hits its target. While eight board members favored maintaining short-term rates at 1.25% to gather additional confirmation on price stability anchoring, Board Member Hajime Takata broke consensus by calling for an immediate interest rate hike, providing financial markets with a clear hawkish signal.

Takata formally proposed raising the uncollateralized overnight call rate target by 25 basis points to approximately 1.50%. In presenting his counter-proposal, Takata argued that with underlying CPI inflation having officially reached the 2% price stability target, the BOJ had entered an entirely new operational phase. In Takata’s assessment, the central bank must rapidly accelerate the pace of bringing the policy interest rate closer to the neutral interest rate. Doing so, he contended, would establish a neutral baseline from which the BOJ could execute nimble, flexible policy adjustments in response to future upside or downside economic shocks.

Takata's hawkish proposal was defeated by an 8-1 majority vote. The consensus line was maintained by Governor Kazuo Ueda, Deputy Governors Ryozo Himino and Shinichi Uchida, alongside Board Members Naoki Tamura, Junko Koeda, Kazuyuki Masu, Toichiro Asada, and Ayano Sato.

Crucially, this board consensus represents a notable institutional shift. In earlier policy meetings—such as July 2026—motions raised by individual members like Naoki Tamura and Hajime Takata asserting that underlying inflation had already reached 2% were defeated by majority vote. By October 2026, however, all nine members of the Policy Board reached a unanimous assessment that underlying CPI inflation had officially arrived at a level consistent with the 2% target, even as they divided over the immediate rate path.

- **The Majority Position (8 Members):** Favors an incremental, data-dependent normalization approach. While acknowledging upside inflation risks and accommodative financial conditions, the majority emphasizes the necessity of evaluating cumulative rate hike effects, domestic SME credit conditions, and international macroeconomic risks before removing further monetary stimulus.
- **The Hawkish Dissent (Hajime Takata):** Advocates preemptive, decisive tightening toward a neutral policy rate. Asserts that once underlying inflation hits 2%, maintaining real interest rates at deeply negative levels risks falling behind the curve, necessitating rapid policy adjustment to build operational flexibility.

This division highlights the central friction governing future policy decisions: the pull between Takata's urge to move rate settings swiftly to neutral and the board majority's preference to verify the stability of inflation expectations before tightening further. Despite this disagreement over benchmark borrowing costs, the board exhibited complete alignment regarding balance sheet unwinding.

## 2\. Accelerated Balance Sheet Normalization: The ETF Disposal Framework

In contrast to the split vote on interest rates, the Policy Board reached a unanimous consensus to significantly accelerate the liquidation of its Exchange-Traded Fund (ETF) portfolio. First launched as a cornerstone of former Governor Haruhiko Kuroda's Quantitative and Qualitative Monetary Easing (QQE) framework, the ETF purchase program accumulated tens of trillions of yen in equity assets. The Policy Board's structural revision marks the most decisive step yet in unwinding this non-conventional asset purchase legacy.

Under the framework established in September 2025 and implemented in January 2026, the BOJ had restricted ETF sales to a conservative pace of approximately 330 billion yen per year at book value. This figure was derived from the bank's prior experience disposing of direct bank stock holdings, representing roughly 0.05% of stock market trading value at the time. However, robust expansion in daily equity trading volumes across Japanese exchanges caused the actual liquidation pace to lag behind market capacity.

To rectify this lag without destabilizing capital markets, the Policy Board amended its "Basic Principles for Disposal of ETFs and J-REITs," effective January 1, 2027\. The amended framework doubles the target share of market trading value to approximately 0.10%, raising the annual sales pace to roughly 860 billion yen on a book-value basis. Utilizing the market-to-book ratios from sales conducted between January and September 2026, this translates to an annual market-value disposal rate of approximately 2.46 trillion yen.

![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/2026/11/Screenshot-2026-11-03-at-10.47.35.png)

This structural adjustment dramatically compresses the operational timeline required for the BOJ to fully exit its equity holdings, reducing the projected liquidation duration from approximately 112 years down to 43 years (calculated by dividing end-September 2026 outstanding holdings by the annual book-value pace). Meanwhile, core operational constants remain intact: Japan Real Estate Investment Trust (J-REIT) disposals remain fixed at roughly 5 billion yen per year on a book-value basis. Furthermore, fundamental disposal principles—selling at adequate prices, minimizing financial losses, preventing equity market destabilization, and retaining provisions for temporary sales pauses during severe market volatility—remain strictly operational.

Expanding overall trading volumes on the Tokyo Stock Exchange Prime Market provided the BOJ with the structural market depth necessary to double its liquidation pace without exerting undue downward pressure on equity valuations. This operational pivot aligns directly with the macroeconomic baseline projections underpinning the central bank's medium-term outlook.

## 3\. Macroeconomic Baseline Scenario & Policy Board Median Forecasts

The BOJ's updated "Outlook for Economic Activity and Prices (October 2026)" projects a moderate economic expansion through Fiscal 2028, shaped by counteracting forces: elevated energy costs driven by persistent Middle East tensions versus structural tailwinds from global artificial intelligence (AI) capital expenditure.

### 3.1 Real GDP Growth Trajectory

In Fiscal 2026, Japan's economic growth is projected to continue at a decelerated pace, with the Policy Board's median real GDP forecast standing at +0.7% (range of +0.7% to +0.8%). Economic activity is currently constrained by crude oil price shocks and raw material cost spikes that have emerged since early spring, deteriorating corporate terms of trade and squeezing household real disposable income. However, growth remains underpinned by accommodative financial conditions, government fuel subsidies, and sustained global demand for AI-related hardware and semiconductors.

From Fiscal 2027 onward, economic growth is expected to moderately accelerate. The median real GDP growth forecast stands at +0.7% for FY2027 (range +0.6% to +0.8%) and +0.8% for FY2028 (range +0.7% to +0.9%). This re-acceleration assumes that the drag from high energy import costs will abate—with Dubai crude oil futures projected to decline from around $105 per barrel to $70 per barrel near the end of the projection period—allowing a virtuous cycle of income-to-spending to take hold. Japan's potential growth rate is estimated to remain positive at approximately 0.5% to 1.0%, supported by digitalization, human capital investments, and steady capital accumulation.

### 3.2 Consumer Price Index (CPI) Dynamics & Structural Labor Bottlenecks

Core CPI inflation (All Items Less Fresh Food) is projected to accelerate significantly above 2% in the first half of Fiscal 2026, reaching a median forecast of +2.5% (range +2.4% to +2.6%). This elevated print is driven by ongoing corporate wage pass-through, elevated crude oil procurement costs, surging semiconductor prices, and the lingering pass-through effects of yen depreciation on imported durable consumer goods.

For Fiscal 2027, the board revised its core CPI median projection upward by 0.2 percentage points to +2.6% (range +2.4% to +2.7%), reflecting higher crude oil prices sustained since the summer. As energy import pressures wane in the second half of the projection period, core CPI is projected to converge toward the price target, hitting a median of +2.0% in Fiscal 2028 (range +2.0% to +2.1%). Core-Core CPI (All Items Less Fresh Food and Energy), which excludes volatile energy inputs, demonstrates deep structural strength across the horizon: median projections stand at +2.4% for FY2026, +2.7% for FY2027, and +2.3% for FY2028.

A key structural finding highlighted in the report is that labor market conditions have tightened to a greater extent than can be explained by changes in the output gap alone. This structural demographic inflection point stems from a notable deceleration in the pace of increase in female and senior labor force participation. As labor supply constraints intensify—particularly across labor-intensive service industries—upward pressure on wages and corporate price-setting behavior has become significantly more pronounced than traditional macroeconomic slack models would predict.

![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/2026/11/Screenshot-2026-11-03-at-10.51.10.png)

**Note: Figures represent median point estimates in bold, with board ranges in parentheses and point changes from the July 2026 Outlook Report in brackets.*

*Uncertainty Note on Fiscal Policy:* The board's official baseline projections explicitly exclude potential macro impacts from ongoing Diet deliberations concerning a proposed temporary consumption tax cut on food and beverages. Should the tax policy outlined in the Cabinet's September 2026 reform plan be enacted, BOJ staff estimates it would reduce FY2027 Core CPI by roughly 1.3 percentage points and Core-Core CPI by 1.4 percentage points, while exerting upward pressure on real GDP growth.

The finding that Core-Core CPI will remain comfortably above 2% through Fiscal 2028 demonstrates that Japanese inflation is no longer a temporary cost-push anomaly, but a structurally entrenched phenomenon driven by continuous corporate price-setting and wage-price feedback loops. This structural shift formed the centerpiece of Governor Kazuo Ueda's press conference following the policy meeting.

## 4\. In-Depth Press Conference Analysis: Governor Kazuo Ueda's Q&A

Governor Kazuo Ueda's post-meeting press conference marked a historic inflection point in central bank communications. Ueda formally signaled that after 13.5 years of aggressive, non-conventional monetary intervention, the BOJ has completed its objective of pushing underlying inflation up to 2%. Consequently, monetary policy has officially entered a new phase focused on stabilizing and anchoring underlying inflation at 2% while containing severe upside overshoot risks.

![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/2026/11/Screenshot-2026-11-03-at-10.55.14.png)

### 4.1 Policy Phase Shift & The 2% Target Milestone

In response to questions regarding the board's underlying inflation assessment, Governor Ueda confirmed that key inflation metrics—including trend inflation models, trimmed means, weighted medians, and medium-to-long-term inflation expectations across households, enterprises, institutional economists, and market Break-Even Inflation (BEI) rates—have collectively converged around 2%.

Ueda contextualized this achievement within the long historical arc beginning with the January 2013 Joint Statement with the Government:

> *"Since 2013, our large-scale monetary easing, combined with various government initiatives, delivered a powerful stimulus to the Japanese economy, restoring the mechanism in which wages and prices moderately rise in tandem... Over the past few years, against the backdrop of global inflationary pressures and tight domestic labor markets, corporate wage and price-setting behavior has become decidedly proactive."*

However, Ueda firmly dismissed suggestions that the BOJ should issue a formal "declaration of victory" or an explicit statement of target achievement:

> *"Central banks do not issue 'victory declarations.' Price stability is a continuous, dynamic management process... Reaching a state where underlying inflation is at 2% does not mean our job is complete. Moving forward, the key objective is to confirm the degree to which underlying CPI inflation becomes firmly anchored around 2%."*

Ueda clarified that during the structural push to elevate price growth, downside inflation risks required maximum tolerance and policy accommodation. In the current phase, however, underlying inflation rising noticeably above 2% cannot be tolerated, requiring active policy calibration to prevent overshooting.

### 4.2 Rate Hike Timing, Risk Balance & "Well-Positioned" Stance

Addressing questions regarding why the Policy Board paused rate hikes in October despite skewed upside inflation risks, Ueda emphasized the necessity of scrutinizing global financial volatility and verifying baseline economic projections before taking further action.

When questioned about market expectations for a rate hike before the end of the year, Ueda emphasized that the central bank remains "well-positioned" with accommodative financial conditions, as real interest rates remain deeply negative:

> *"At each upcoming Monetary Policy Meeting, including December and beyond, we will rigorously assess the likelihood of our baseline projection materializing alongside surrounding risk factors... Policy interest rates are currently below neutral, keeping financial conditions accommodative. Adjustments will be made meeting-by-meeting based on incoming data, cumulative policy impacts, and external developments in the Middle East, foreign exchange markets, and global AI demand."*

Ueda stressed that while upside price risks remain non-negligible, the marginal risk intensity had not surged dramatically over the preceding month, justifying a temporary pause to assess incoming macroeconomic statistics.

### 4.3 Corporate Liquidity, Real Economy Impact & Financial Conditions

Addressing commercial financial conditions, Governor Ueda noted that broad financial intermediation remains highly functioning, with private bank lending expanding steadily and issuance conditions for corporate paper and corporate bonds remaining exceptionally favorable.

However, Ueda acknowledged emerging financial friction at the margin, citing feedback gathered from regional branch manager meetings and enterprise surveys:

> *"While financial conditions overall remain accommodative, detailed branch feedback and sector-specific surveys indicate that small and medium-sized enterprises (SMEs) are beginning to report tighter cash flow conditions and rising hurdle rates for capital investment as borrowing costs edge higher."*

Ueda firmly rejected assertions from critical observers claiming that the BOJ is hesitating to raise interest rates out of fear of sparking bond market volatility or overburdening the national treasury's debt-servicing costs:

> *"Our monetary policy decisions are grounded strictly in achieving our mandate of price stability and supporting sustainable economic growth. Claims of fiscal dominance or financial market dominance playing a role in our rate timing are entirely incorrect."*

### 4.4 Structural Drivers: AI Demand, FX Volatility & Global Central Bank Dynamics

The press conference addressed the complex interplay between structural technology trends, foreign exchange movements, and international central bank tightening cycles.

- **Global AI Investment Dynamics:** Responding to recent stock market corrections triggered by tech sector earnings, Ueda drew a sharp distinction between fundamental real-economy demand and equity market valuation volatility. He noted that business fixed investment for AI infrastructure, data centers, and advanced semiconductors remains robust. Stock market volatility occurs primarily when short-term corporate earnings reports lag behind elevated equity market expectations, a structural digestion phase that will likely repeat periodically.
- **Foreign Exchange Pass-Through:** Ueda warned that foreign exchange dynamics now transmit through the domestic economy differently than in past decades. With Japanese firms having shifted toward active price-setting, yen depreciation passes import price increases through to consumer durable goods at a significantly faster velocity, directly threatening to unanchor inflation expectations if left unchecked.
- **Global Policy Spillovers:** Re-tightening actions and sustained high interest rates by major Western central banks transmit into Japan via global financial market channels, driving up long-term bond yields and accentuating foreign exchange volatility.

### 4.5 Balance Sheet Mechanics & ETF Acceleration Rationale

Explaining the operational justification for doubling the annual ETF disposal pace, Governor Ueda pointed to empirical data collected over the initial 10 months of sales starting in January 2026.

Ueda explained that during late spring and summer, actual BOJ disposal amounts fell below the targeted 0.05% share of daily stock market trading volume due to a massive, unexpected surge in total trading value on the Tokyo Stock Exchange Prime Market. Following a comprehensive review of the past year's disposal operations and decade-long historical bank stock sales, the board determined that the equity market could easily digest an annual sales volume equivalent to 0.10% of trading value (\~860 billion yen book value / \~2.46 trillion yen market value) without inducing equity price volatility.

Ueda also clarified an apparent operational paradox regarding balance sheet valuation: while the physical quantity (unit/share count) of ETFs held by the BOJ will decline steadily every month, the total *monetary value* (book/market value) appearing on the balance sheet will fluctuate depending on broader stock market price movements.

### 4.6 Wage Negotiations (Shunto), Usability of the Yen & Institutional Legacy

Looking ahead to the 2027 Spring Wage Negotiations (Shunto), Governor Ueda stated that for 2% inflation anchoring to become permanent, a 2% baseline price expectation must become structurally embedded into annual labor-management wage bargaining frameworks across both large corporations and regional firms.

On the long-term trust and utility of the national currency, Ueda delivered a notable perspective linking price stability to financial technology:

> *"When persistent high inflation erodes purchasing power, public trust in the domestic currency diminishes... In an era of rapid payment technology advancement—where international digital assets and foreign stablecoins are increasingly accessible—failing to maintain domestic price stability significantly increases the systemic penalty, as capital can rapidly migrate toward alternative settlement assets."*

Concluding with a reflection on monetary economics, Governor Ueda acknowledged the recent awarding of the Nobel Prize in Economics to Professor Michael Woodford. Recalling extensive personal theoretical debates with Woodford during Ueda's former tenure as a Policy Board member in the late 1990s and early 2000s, Ueda noted that while zero-lower-bound forward guidance mechanisms must evolve when transitioning to inflation containment, Woodford's core thesis—that clear, transparent central bank policy communication anchors market expectations—remains the bedrock of modern central banking strategy.

Through this press conference performance, Governor Ueda successfully orchestrated a complex communication balancing act: signaling to financial markets that future interest rate hikes remain firmly on the table to suppress upside risks, while retaining total operational flexibility to calibrate those hikes against real economic data.

## 5\. Comprehensive Risk Matrix & The Path to Policy Neutrality

As the Bank of Japan navigates this structural transition, its monetary policy path will be governed by a complex matrix of upside inflation risks and downside real economy threats.

![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/2026/11/Screenshot-2026-11-03-at-10.58.51.png)

With real policy interest rates remaining in deeply negative territory and underlying CPI inflation anchored at 2%, the BOJ's current policy stance remains highly accommodative. The balance of risks outlined in the October 2026 Outlook Report confirms that while economic growth risks are broadly balanced, price risks remain tilted to the upside.

Consequently, the path of least resistance for the BOJ is a sustained, incremental trajectory of policy rate hikes toward neutral—estimated by market observers to lie well above current levels. However, because small-to-medium enterprise liquidity is tightening at the margin and real household incomes remain vulnerable to global raw material shocks, the Policy Board will refrain from mechanical rate paths. Instead, the central bank will execute incremental, meeting-by-meeting tightening steps, leveraging its accelerated ETF unwind to reduce balance sheet bloat while using short-term interest rate adjustments to keep inflation firmly anchored at its 2% target.

---

[The Bank of Japan’s Transition to Inflation Stabilization at the September MPMFor over two decades, the Bank of Japan (BoJ) existed in a state of perpetual emergency. Since the late 1990s, the institution was defined by its "reflationary" mission—a singular, often desperate struggle to extricate the Japanese economy from a debilitating deflationary trap. This era was characterized by unconventional tools:![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/icon/Newsletter-Small-b00ae51d-d341-4c06-86ed-1da864e5ce31.png)Japan FinTech ObserverNorbert Gehrke![](https://storage.ghost.io/c/46/cb/46cbd57f-e0e8-41a4-a1e2-710103a4267b/content/images/thumbnail/BOJ-September-MPM-fba26a5e-ed3a-4f56-9f0b-6c28e3a4f7ae.png)](https://www.fintechobserver.com/the-bank-of-japans-transition-to-inflation-stabilization-at-the-september-mpm/)