The Bank of Japan has increased its policy rate to 1%, marking the highest level in over 30 years, in a move that aligns with widespread expectations and accelerates the monetary policy normalization process that began in 2024.
This decision represents another hike following the increase to 0.75% in December last year and is the first time Japan's policy rate has reached 1% since 1995.
The vote to raise rates by 25 basis points was 7 in favor and 1 against, with board member Asada Ichiro dissenting in favor of maintaining the current rate.
This tightening measure comes against the backdrop of a persistently weak Japanese yen, influenced by conflicts involving Iran, and a renewed, quiet uptick in domestic inflation.
Following the announcement, the Nikkei 225 index rose by 0.46%, the USD/JPY pair dipped slightly to 160.22, and the yield on Japan's 10-year government bond climbed by 3 basis points to 2.615%.
The Bank of Japan stated it will continue to reduce its government bond purchases by 200 billion yen per quarter and will conclude its balance sheet reduction operations starting from April 2027, thereafter maintaining a fixed monthly purchase amount of 2 trillion yen in Japanese government bonds.
The central bank noted that, thanks to government policies aimed at alleviating the burden of rising energy costs on households, current consumer inflation in Japan is temporarily below the 2% target.
However, the bank's statement indicated that cost-push pressures from rising crude oil prices are being transmitted quickly through inter-company trade and may subsequently spread to a wide range of consumer goods, leading to broader price increases.
Japan's Producer Price Index for May rose by 6.3% year-on-year, marking the largest increase in over three years, with surging energy costs being the primary driver.
An analysis suggests that while this rate hike was largely anticipated by the market, the high proportion of votes in favor within the policy board indicates that policymakers are currently prioritizing inflation risks over economic growth concerns.
It was further noted that the potential reopening of the Strait of Hormuz, which would significantly reduce uncertainty regarding energy supply shocks for Japan, has provided the Bank of Japan with greater confidence to resume its path toward monetary normalization.
Weak Yen Compels Rate Hike
The depreciation of the yen was a key factor prompting this rate increase. Japan intervened in the currency market in May with a massive 11.7 trillion yen to support the yen, but the currency weakened again afterward, with USD/JPY touching the 160 level and hovering around that mark for much of June.
An expert commented that relying solely on currency intervention without adjusting domestic monetary policy is akin to pressing the brake while keeping the accelerator firmly floored, which at best only temporarily stabilizes the market and at worst continually depletes the buffer for foreign exchange intervention.
While yen depreciation can enhance the competitiveness of Japanese exports, it also fuels imported inflation. Government subsidies introduced to counter rising prices continue to add to fiscal pressures.
The Japanese cabinet approved a supplementary budget of 3 trillion yen several months after the annual budget was passed, aimed at subsidizing households to cushion the impact of energy price hikes.
Japan's core Consumer Price Index for April fell to 1.4% year-on-year, below market expectations and hitting its lowest level since March 2022. Overall inflation was also 1.4%, marking the fourth consecutive month it has remained below the central bank's 2% target.
However, several analysts point out that the currently low inflation figures are largely due to a series of price control measures, including a reduction in gasoline taxes and the nationwide implementation of free high school education, which have artificially suppressed price increases.
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