The Bank of Japan (BOJ) increased its key interest rate by a quarter point to 1.25%, marking the highest level since 1995. This move, predicted by economists, came just three months after the previous hike. Despite the rate increase, the Japanese yen weakened against the dollar, falling as much as 0.7% to 157.09 per greenback. This counterintuitive market reaction is attributed to the split decision by the BOJ's board, with two members dissenting, casting doubt on the pace of future policy tightening. The vote was 7-2, with board members Toichiro Asada and Ayano Sato voting against the hike, arguing that current economic and price developments did not warrant it given that core inflation for August stood at 1.7%, down from 1.8% in July.
The market's reaction was also influenced by the absence of an updated outlook report, which limited the BOJ's ability to reinforce a hawkish message through revised forecasts. Analysts like Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, noted that the two dissenting votes came as a surprise, indicating that the bank might not adopt a too hawkish stance. The decision also came after U.S. Treasury Secretary Scott Bessent had stressed the need for higher BOJ rates to Japanese Finance Minister Satsuki Katayama in May.
Following the rate hike, Japanese stocks rose, with the Nikkei 225 gaining 1.5%, while the 10-year Japanese government bond yield slipped. Experts believe another rate hike is likely around December, with some analysts like Sam Jochim of EFG International expecting a terminal rate between 1.75% and 2% in 2027. However, Stefan Angrick of Moody's Analytics suggests that weak demand-driven inflation and disappointing real-wage growth could limit subsequent moves. The BOJ stated it would continue raising rates as economic and price conditions develop, but also acknowledged that growth was likely to decelerate due to high oil prices from the Middle East conflict.
