Bank of Japan hikes rates to highest since 1995 as yen languishes at historic lows

Bank of Japan on Tuesday increased the policy rate Accelerating policy normalization begins in 2024 and rises to 1%, a 30-year high, in line with expectations of economists polled by Reuters.

This was the first increase since December, when the Bank of Japan raised interest rates to 0.75% and the first since 1995 to 1%.

The BOJ said the decision was split 7 to 1, with board member Toichiro Asada opposing it and advocating keeping the interest rate at 0.75%.

The tightening of policy comes at a time when Japan is struggling with a weak yen and inflation is rising, partly due to the Iran war.

Criterion Nikkei 225 After the decision, it increased by 0.46 percent. yen It strengthened marginally against the dollar and rose to 160.22. Yield 10-year Japanese Government Bonds It rose 3 basis points to 2.615%.

The central bank said it would do this. continue to reduce government bond purchases We aim to increase by 200 billion yen per calendar quarter before halting tapering and resuming monthly JGB purchases of 2 trillion yen from April 2027.

Consumer inflation in Japan is below 2% due to government measures to reduce the household burden caused by high energy prices, the BOJ said.

“However, the price pass-through resulting from the increase in crude oil prices proceeds relatively quickly in business-to-business transactions, and this may spread to increases in consumer prices on a wide range of items,” the central bank said. he said.

This can be seen in Japan producer price index, This increase, which rose 6.3% in May, was the fastest increase in three years and was mainly driven by rising energy costs.

Tai Hui, chief market strategist for Asia Pacific at JP Morgan Asset Management, said the interest rate hike was expected, but the overwhelming support among BOJ members showed the board was more wary of inflation concerns than growth.

He added that rising expectations for the reopening of the Strait of Hormuz, which reduces uncertainty about supply shocks to Japan, provides the BOJ with greater confidence in resuming policy normalization.

The weakness in the Japanese yen also supported the interest rate increase. After it was reported that he had jumped outside 11.7 trillion yen ($73.5 billion) Following intervention operations in May, the yen weakened again, touching 160 against the dollar and remaining at that level for most of June.

“Intervening without changing domestic monetary policy is like hitting the brakes while keeping your right foot firmly on the accelerator; at best, your passengers will have some fun, at worst you’ll burn through your brake pads,” Jesper Koll, managing director at Tokyo-based financial services firm Monex Group, told CNBC.

Weak yenAlthough it will increase the competitiveness of Japan’s exports, imports will increase inflation and put pressure on government finances, which have tried to cushion the impact of rising prices through subsidies.

Prime Minister Sanae Takaichi’s administration enacted a 3 trillion yen supplementary budget to protect households from rising energy costs months after the annual budget was adopted.

Japan’s core inflation fell more than expected in April to 1.4%, its lowest level since March 2022; Headline inflation was also at 1.4%, the fourth consecutive month of the central bank’s 2% target.

But analysts told CNBC that the low inflation figures were largely the result of various policy measures that suppressed inflation, including eliminating Japan’s gasoline tax and making high school tuition-free for all students.