By Leika Kihara, Takaya Yamaguchi
TOKYO- The Bank of Japan raised interest rates in a mostly unexpected move on Wednesday and unveiled a detailed plan to slow its massive bond buying, taking another step towards phasing out a decade of huge stimulus.
The decision, which defied dominant market expectations for the BOJ to stand pat on rates, takes its short-term policy rate to levels unseen since 2008.
At the two-day meeting ending on Wednesday, the BOJ’s board decided to raise the overnight call rate target to 0.25 percent from 0-0.1 percent in a 7-2 vote.
It also decided on a quantitative tightening (QT) plan that would roughly halve monthly bond buying to 3 trillion yen ($19.6 billion), from the current 6 trillion yen, as of January-March 2026.
Japan’s shift to tighter monetary policy contrasts sharply with the broad swing to lower interest rates by other major economies, with the Federal Reserve increasingly likely to cut rates in September as US price pressures moderate.
“Despite sluggish consumer spending, monetary officials sent a decisive signal by raising interest rates and allowing for a more gradual balance sheet reduction,” said Fred Neumann, chief Asia economist at HSBC.
“Rising inflation expectations also open the path for ongoing monetary policy normalization by the BOJ. Barring major disruptions, the BOJ is on course to tighten further, with another interest hike by the start of next year,” he said.
The yen rallied as much as 0.8 percent to an over three-month high of 151.58 per dollar immediately after the outcome, though reversed those gains. Yields on the 10-year Japanese government bonds fell slightly on the news.
Japanese banking stocks led the benchmark Nikkei higher after the hike, with higher rates expected to improve lending margins and boost investment income for banks.
In a statement, the BOJ said its rate increase was based on its view that wage hikes were broadening and prodding firms to pass on higher labor costs through increases in services prices.
Import prices were again accelerating despite some recent moderation, the BOJ said, stressing the need to be vigilant to the risk of an overshoot in inflation.
“Given that real interest rates are at significantly low levels, the BOJ will continue to raise rates and adjust the degree of monetary accommodation” if the economy and prices move in line with its latest projections, it said. – Reuters
