BOJ Raises Interest Rates! Policy Rate Increased to 0.25%

　　On July 31, the BOJ decided to further increase its interest rates during its monetary policy meeting. The policy rate (the uncollateralized overnight call rate) will rise from 0 to 0.15%-0.25%, effective from August 1.

　　Image source: Yahoo Finance

　　BOJ Governor Kazuo Ueda will hold a press conference at 3:30 p.m. on July 31 to provide a detailed explanation of this decision. The BOJ's statement noted that “a moderate adjustment to monetary easing is appropriate from the perspective of achieving sustainable stability of the 2% inflation target.” If economic and price trends meet expectations, the BOJ will “continue to raise the policy rate and adjust monetary easing.”

　　Additionally, the BOJ decided to reduce its monthly government bond purchases from 6 trillion yen to 3 trillion yen between January and March 2026, decreasing by 400 billion yen per quarter. All members of the policy board agreed to this reduction plan, which will start in August. It is expected that by March 2026, the BOJs holdings of approximately 600 trillion yen in government bonds will decrease by 7-8% due to the reduced purchase amount.

　　In supplementary documents, the BOJ explained that “to ensure stability in the government bond market, purchases should be reduced in a predictable manner while maintaining flexibility.” Furthermore, a mid-term assessment will take place in June 2025, and if long-term interest rates rise significantly, the BOJ will “flexibly increase the purchase amount.”

July Economic and Price Outlook Report

　　In July, the BOJ released its Economic and Price Outlook Report. The report forecasts a 2.2% year-on-year increase in the consumer price index (CPI) for FY2025 (excluding fresh food), accelerating for the third consecutive month and maintaining market expectations for recent rate hikes. For FY2024, the core CPI is forecasted at 2.5%, down from the previous prediction of 2.8%; for FY2025, the core CPI is forecasted at 2.1%, up from 1.9%; and for FY2026, the core CPI is forecasted at 1.9%, unchanged from the previous prediction.

　　The core CPI excluding energy for FY2024 is forecasted at 1.9%, the same as previously predicted; for FY2025, it is also forecasted at 1.9%, unchanged; and for FY2026, it is forecasted at 2.1%, unchanged.

　　Image source: Wall Street Journal

　　The report highlights “significant upside risks” to the price outlook for FY2024 and FY2025. Companies are becoming more proactive in setting wages and prices, and exchange rate fluctuations now have a more pronounced impact on prices compared to the past.

　　After ending negative interest rates, the BOJ has kept short-term rates at near-zero levels. The increase in the benchmark rate to 0.25% returns it to around 0.3%, the level seen since the Lehman crisis in December 2008. Additional rate hikes will affect household savings, mortgage rates, and business borrowing rates.

　　Among the nine policy board members, Toyoaki Nakamura and Asahi Noguchi opposed the rate hike. Nakamura stated that the reasons for opposition would be further clarified in the September decision meeting based on corporate statistics and other data. Noguchi believes that the impact of wage increases on economic conditions needs to be carefully assessed based on data.

Market Impact

　　In the Tokyo forex market, the yen briefly strengthened to 151.50 yen per dollar. This volatility stemmed from the BOJ's decision to further raise interest rates, aiming to narrow the interest rate differential between Japan and the U.S. This is the first instance of a strong yen and weak dollar situation since April 9, in about four months. Subsequently, the yen saw significant fluctuations, once falling to 153 yen per dollar.

　　In the domestic bond market, Japanese short-term government bond yields hit a 15-year high on Wednesday. Japanese bank stocks surged as the BOJ raised rates for the second time since 2007 and halved its monthly bond purchases. The yield on two-year Japanese government bonds jumped 8 basis points to 0.45%, the highest since April 2009. The five-year Japanese government bond yield rose 8 basis points to 0.665%, the highest since November 2009. The Tokyo Stock Exchange bank index climbed 4.7%, helping the Nikkei index reverse an earlier decline.

　　Higher interest rates are expected to boost loan profitability and investment returns, with bank stocks being the biggest beneficiaries of the BOJs policy. Resona Holdings led the Nikkei index with a 6.7% increase; Mizuho Financial Group rose 5.1%; and Sumitomo Mitsui Financial Group gained 4.5%.

　　The Nikkei index closed up 1.5% at 39,101.82 points, recovering from an earlier 1.5% decline and crossing the 39,000-point psychological barrier for the first time in a week. The Topix index also closed up 1.5%. The Value Stock Index rose 1.7%, surpassing the 1.2% gain of Growth Stocks.

　　Image source: CNBC

　　Foreign investment flows into the Japanese banking sector are significantly higher than other industries, as investors view it as the biggest beneficiary of potential monetary tightening. According to JPMorgan's quantitative strategy team, bank stocks attracted about 472 billion yen in net stock purchases over the past year, more than twice the inflow into the automotive and parts sectors.

　　Most automakers reversed early declines to close higher, but Toyota fell 1.6% due to a corrective order from the Japanese Ministry of Transport for violations in its vehicle certification procedures.