On Wednesday, July 31st, the Bank of Japan announced a rate hike and balance sheet reduction, exceeding expectations with a 15 basis-point increase, and a quarterly reduction of 40 billion yen in bond purchases. After this unexpected hawkish move, will the Bank of Japan take further action?
After the monetary policy meeting, Bank of Japan Governor Haruhiko Kuroda held a press conference. Kuroda stated that 0.5% is not seen as a specific upper limit of interest rates. After raising the benchmark interest rate to 0.25%, the impact of higher rates on the economy would be limited. Whether to continue raising interest rates within the year will depend on economic data performance.
Kuroda expects that in the latter half of the outlook period until March 2027, consumer price increases will be around the bank's target of 2%. He further added that even with the rate hike on Wednesday, actual interest rates remain low. If current economic and price outlooks are achieved, interest rates will continue to rise, and the degree of easing policies will be adjusted.
Kuroda stated that the current rate hike is appropriate. Japan's April and May consumer data were strong, and the Japanese economy is gradually recovering. However, it is necessary to pay attention to the risks of rising prices. Inflation is expected to approach the target in the second half of the year.
Kazuo Ueta believes that the Bank of Japan and the government share the same basic economic views, and they frequently exchange views. As for when to raise interest rates again, he pointed out that there is no preset time for the next rate hike. Interest rate hikes are based on expectations of rising wages.
Regarding the outlook for bond purchases, Kuroda stated that the Bank of Japan will adjust the purchase plan as needed, but for predictability plans, the quarterly plan is published. He explained that the amount of Japanese government bonds held will decrease by 7-8% in about two years. When evaluating the effects of interest rate hikes, terminal interest rates will be carefully considered. A decrease in the amount of government bonds held will not create too much upward pressure on yields.
Market analysis believes that the rate hike action of the Bank of Japan may be a turning point for the struggling yen. Regarding the market's concerns about the trend of the yen, Kazuo Ueta stated that it is necessary to closely monitor the financial market and foreign exchange market, and their impact on the Japanese economy and prices. Exchange rate fluctuations are more likely to affect inflation than before. A weak yen brings inflation upside risks.
After the speech by the Governor of the Bank of Japan, the US dollar fell against the yen, currently down 0.35%. Japan's 10-year treasury notes yield slightly decreased.
Before delivering this speech, Kuroda had been silent about monetary policy for over 40 days, setting the longest "silence" record. His last public speech was on June 18th, where he explicitly stated that a rate hike was likely if data supported it. Since then, Japanese economic data has been mixed, with high inflation expectations but no significant rebound in consumer spending.
Today, the Bank of Japan announced a 15 basis point rate hike, raising the policy rate to 0.15% -0.25%. At the same time, the Bank of Japan announced a reduction plan for bond purchases, reducing purchases by 400 billion yen per quarter and no longer providing a range of bond purchases but a specified amount. Analysts believe this rate decision is not dovish, and the Bank of Japan has committed in writing to further increase interest rates if the good economic activity and inflation outlooks continue.
Frederic Neumann, Chief Economist for Asia at HSBC, said that rising inflation expectations have also paved the way for the Bank of Japan to continue normalizing monetary policy. Unless there is significant disturbance, the Bank of Japan will further tighten monetary policy and hike interest rates again in early next year.
Analysts Toru Fujioka and Sumio Ito believe that the Bank of Japan will raise its policy rate and also indicate that it will reduce the monthly bond purchase rate to around 3 trillion yen in the first quarter of 2026. Governor Kuroda signaled the bank's intention to continue the normalization process and Wednesday's actions may fuel speculation of another interest rate hike this year. The Bank of Japan's hawkish tone ahead of the upcoming Fed meeting may signal a turning point for the trapped yen, as traders expect the US-Japan interest rate gap to narrow.
Editor/ping