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TOKYO: The Bank of Japan kept interest rates around zero on Friday and issued fresh estimates projecting inflation to stay near its 2% target in the next three years, signalling its readiness to hike borrowing costs later this year.

The central bank said it will keep buying government bonds based on guidance decided in March, when it pledged to buy roughly 6 trillion yen ($38.45 billion) per month.

As widely expected, the BOJ maintained its short-term interest rate target at a range of 0-0.1%, which was set just a month ago when it made a historical exit from its massive stimulus programme.

“Trend inflation is expected to increase gradually” as a virtuous cycle of rising wage and price growth continues to strengthen, the BOJ said in a quarterly outlook report.

“It is likely to be at a level that is generally consistent with the price target” around late 2025 through 2026, it said.

Japan’s Nikkei stock average rose more than 1% after the announcement, while the yen fell to a fresh 34-year low past 156 to the dollar as the decision dashed some outlying expectation in the market that the BOJ might hike.

In a quarterly outlook report released after the meeting, the board projected core consumer inflation to hit 2.8% in the year that began in April, before slowing to 1.9% in fiscal 2025 and 2026.

The board expected so-called “core core” index, which excludes the effect of fuel costs, to hit 1.9% in both fiscal 2024 and 2025, before accelerating to 2.1% in 2026.

“The forecast, very clearly in the upper 2% range, opens the way to future rate hikes given, of course, that the ‘virtuous circle’ stays intact,” said Naomi Fink, global strategist at Nikko Asset Management.

Japan’s Nikkei rises as chip shares rebound; BOJ decision in focus

“The key to the ‘virtuous circle’ remains positive real wages, and higher-than-expected inflation would challenge this virtuous circle. Only in the event inflation is eating into real wages, this is an argument for greater central bank hawkishness,” she said.

Markets are focusing on any hints from Governor Kazuo Ueda’s post-meeting press conference on how the weak yen could affect the next rate hike timing as well as any details on the future of the BOJ’s bond buying programme.

Recent threats of intervention by Japanese authorities have failed to arrest the yen’s slide against the dollar to levels unseen since 1990, adding to headaches for policymakers worried about the hit to consumption from rising living costs.

The yen’s falls are driven by receding expectations of a near-term US interest rate cut, and reassurances by the BOJ that it won’t hike rates aggressively after having ended eight years of negative interest rates in March.

Ueda may feel pressure to join the government in warning traders against pushing down the currency too much, some analysts say.

Ueda has said the BOJ could lift rates further if it becomes confident wage gains will broaden and prod firms to hike service prices, thereby kicking off a cycle of wage and price rises.

Data released on Friday showed Tokyo core inflation, a leading indicator of nationwide figures, slowed much more than expected to slip below the BOJ’s 2% target in April, underscoring uncertainty over the price outlook.

Economists polled by Reuters are divided on the timing of the BOJ’s next hike with some betting on action in the third quarter, while others project October-December or beyond.

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