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The Bank of Japan has lifted its benchmark interest rate to 0.25 per cent and outlined plans to halve its monthly bond purchases in a decisive move to tighten monetary policy.
With the US Federal Reserve set to move in the opposite direction, the BoJ’s shift to tighter policy will narrow an interest rate gap that has driven record weakness in the yen, marking a big shift for global currency markets.
The Japanese currency strengthened more than 1 per cent following the decision on Wednesday to ¥150.70 against the dollar.
By a majority of 7-2, the BoJ raised its overnight interest rate to “around 0.25 per cent”, the highest level since the global financial crisis in late 2008, from a previous range of zero to 0.1 per cent. The bank in March ended its negative interest rate policy following decades of on-and-off deflation.
The BoJ also said it would scale back its ¥6tn ($39bn) monthly bond-buying programme to about ¥3tn by the spring of 2026.
The rate rise came after senior government officials made unusually blunt comments in recent weeks, putting pressure on the BoJ to unwind its ultra-loose monetary policy and arrest the yen’s decline.
At a news conference on Wednesday, central bank governor Kazuo Ueda said the rate decision was made because economic conditions and price movements remained “on track”. But he acknowledged that upside risks to inflation posed by the weaker yen were also a factor.
“We plan to continue raising our policy rate and adjust the degree of monetary accommodation” if economic conditions and inflation move in line with its forecast, Ueda added.
Ahead of the policy decision, traders were evenly split on the prospect of the BoJ lifting short-term interest rates, with some economists cautioning against a move following a string of weak economic data.
Core inflation, which excludes volatile food prices, rose 2.6 per cent from a year earlier in June, exceeding the BoJ’s 2 per cent target for 27 consecutive months. However, Japan’s economy contracted in the first three months of the year as the yen’s decline and rising living costs hurt household spending.
“It’s extremely disappointing that the BoJ has chosen to act by ignoring weak economic data. It now looks like it moved to counter the weak yen,” said UBS economist Masamichi Adachi. “The normalisation of Japan’s economy was very precarious to begin with, but the BoJ has made it even more difficult.”
For the fiscal year to March 2026, the BoJ said it expected consumer price inflation of 2.1 per cent, instead of the 1.9 per cent it forecast in April.
Stefan Angrick, a senior economist at Moody’s Analytics, pointed to the BoJ’s new emphasis on the yen’s inflationary impact but added that the central bank was still “hiking into a weak economy” in the absence of demand-driven inflation.
“I think the BoJ needs to be clear about the fact that they’re changing the rules. They’re not winning the game,” Angrick said. He forecast the next rate increase would be in December, noting that yen pressure on the BoJ was likely to wane once the Fed started cutting rates.
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