The Bank of Japan left its policy rate unchanged on 30 October, voting 8–1 to encourage the uncollateralised overnight call rate to remain at around 1.25%. Hajime Takata, a member of the Policy Board, dissented. Takata argued that “with underlying CPI inflation having reached the price stability target, the situation had shifted to a new phase” and proposed a rise to 1.5%. The proposal was defeated.
The board was unanimous on a second decision. From January 2027 the bank will sell its exchange-traded fund holdings at about ¥860bn a year at book value, a scale of about 0.1% of stock-market trading value, up from about ¥330bn (about 0.05%). At market prices the new pace is about ¥2,460bn a year, the bank said. Its quarterly Outlook Report added that underlying CPI inflation “is at a level that is generally consistent with the price stability target of 2 percent”, and that risks to prices “are skewed to the upside”.
Why December is in play
The board’s median forecasts put inflation excluding fresh food at 2.5% in fiscal 2026 and 2.6% in fiscal 2027, before 2.0% in fiscal 2028. The bank also said that although real interest rates “have been rising recently, they have remained at low levels, mainly in the short-term zone”, and that financial conditions have remained accommodative. A Reuters poll taken on 13–19 October found that 54 of 78 economists expected a rise to 1.5% this quarter, and about 80% of those naming a month chose December. The next policy meeting is on 17–18 December.
Long-term yields are already well above the policy rate. The 10-year Japanese government bond yielded 2.876% on 29 October and the 30-year 3.956%, according to Ministry of Finance data.
What it means for GPIF, insurers and global owners
Japan’s public pension reserves totalled ¥320,373.2bn at the end of June, of which about ¥2.6 trillion sits in the pension special account and the rest is managed by the Government Pension Investment Fund. Its policy mix is 25% each in domestic bonds, foreign bonds, domestic equities and foreign equities; at the end of June foreign bonds were 24.60% of the portfolio and foreign equities 25.33%. Because GPIF classifies yen-hedged foreign bonds as domestic bonds, its foreign-bond allocation is exposed to the currency. A rate path that strengthens the yen would cut the yen value of those holdings, while higher domestic yields raise the income on new bonds and mark down the price of existing ones.
Life insurers, which buy long-dated bonds to match long-dated policies, face a sharper version of the same trade-off. Insurance Business reported in June, citing Japan Securities Dealers Association data, that insurers sold a net ¥201.2bn of government bonds with maturities of more than 10 years in May. With the 30-year yield at 3.956% in the latest official data, the case for keeping money at home strengthens, but so do the paper losses on bonds bought when yields were lower.
For global owners the risk sits in the currency. The yen traded at 156.87 per dollar on 23 October, according to FRED, and Reuters described it on 20 October as “only about 4% stronger than its 2026 low of around 164 per dollar”. Each rise in Japanese rates narrows the yield gap that makes borrowing in yen to buy higher-yielding assets profitable. A faster unwinding of those positions, or a decision by Japanese institutions to bring savings home, could lift the yen and add selling pressure to foreign bond markets. Owners holding unhedged Japanese assets would gain on the currency; those funding positions in yen would not.
The repatriation case can be overstated. On 29 October the US 10-year Treasury yielded 4.98%, against 2.876% for its Japanese equivalent, so the basic arithmetic of the carry trade still works, and the board chose to wait. The bank’s forecasts also exclude the impact of a proposed cut in the consumption tax on food and beverages, which adds uncertainty to the inflation path that will guide December.
What to watch
- 2 November: the full text of the October Outlook Report.
- 10 November: the Summary of Opinions from the October meeting.
- 17–18 December: the next policy meeting, followed by minutes of the October meeting on 23 December.
- January 2027: the faster pace of ETF sales takes effect.
Sources
- Statement on Monetary Policy, Bank of Japan, 30 October 2026
- Outlook for Economic Activity and Prices (October 2026, The Bank’s View), Bank of Japan, 30 October 2026
- (Reference) Outlook Report and Indicators Related to Underlying Inflation, Bank of Japan, 30 October 2026
- Monetary Policy Meetings, Bank of Japan, 30 October 2026
- Interest Rate (October 2026), JGB yields by maturity, Ministry of Finance Japan, 29 October 2026
- Investment results for 1Q of fiscal 2026, Government Pension Investment Fund, 7 August 2026
- BOJ to Raise Rates to 1.50% in December, Sticking to Quarterly Pace: Reuters Poll, Reuters via GV Wire, 20 October 2026
- Japanese Yen to U.S. Dollar Spot Exchange Rate (DEXJPUS), FRED, Federal Reserve Bank of St. Louis, 23 October 2026
- H.15 Selected Interest Rates (Daily), October 30, 2026, Board of Governors of the Federal Reserve System, 30 October 2026
- Japan insurers offload superlong government bonds, Insurance Business, 24 June 2026