The Bank of Japan's nine-member board decide in a unanimous vote to hold the overnight interest rate target steady in a range of 0 percent to 0.1 percent, as widely expected, after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote in March. At the same time, the board decided in an 8 to 1 vote to set the stage for gradually reducing the bank's large holdings of various financial assets for the next year or two years.

The no vote came from the usual suspect, Toyoaki Nakamura, a former Hitachi executive. He supports the idea of lowering JGB buying but argues that such a decision should be made after assessing growth and inflation prospects in the bank's quarterly Outlook Report to be issued after the July 30-31 meeting. In March, Nakamura was one of the two members who dissented in a vote to end the negative interest rate policy and set the overnight rate target above zero.

"Regarding the purchases of Japanese government bonds, CP (commercial paper) and corporate bonds, the bank will conduct purchases in accordance with the decisions made at the March 2024 MPM (monetary policy meeting)," the bank said, repeating its statement issued after the previous meeting in April.

The board also decided that"it would reduce its purchase amount JGBs thereafter to ensure long-term interest rates would be formed more freely in financial markets" as part of its move to gradually normalize its monetary policy after 11 years of large-scale easing."It will collect views among market participants and at the next MPM, will decide on a detailed plan for the reduction of its purchase amount for the next one to two years or so."

Market participants expect the BoJ to raise the overnight rate again in July or September, and possibly one more time by year-end, barring any sharp downturn in economic growth.

At the March meeting, the bank decided to no longer target the yield on 10-year Japanese government bonds (JGBs), which had been capped at around 0.1 percent, but also decided to continue its purchases of JGBs"with broadly the same amount as before," which is about 6 trillion yen a month. In case of a rapid rise in long-term rates, the bank said at the time that it would"make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchases of JGBs."

In March, the board also decided unanimously to stop new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS), and discontinue the purchases of commercial paper and corporate bonds in about a year by reducing them gradually. The bank used those large-scale asset purchases to support market and economic sentiment.

Since the short-term rate is close to zero, bank officials have noted that the monetary conditions will remain accommodative for now, but they have also acknowledged the negative impact of the weak yen on high import costs, which is partly due to the outlook that interest rates in Japan will stay well below those in the U.S., keeping the dollar's relative strength.

"Japan's economy is likely to keep growing at a pace above its potential growth rate (estimated by the bank to be zero to 0.5 percent), with overseas economies growing moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions," the BOJ said, repeating its recent assessment.

Looking ahead, the bank also repeated its long-held assessment that"there are extremely high uncertainties" surrounding Japan's economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior."Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BOJ said, repeating its past statements.

In its Outlook Report issued in April, the BoJ largely maintained its latest inflation outlook that the year-on-year increase in the core CPI (excluding fresh food prices) is likely to be in the range of 2.5 percent to 3.0 percent for fiscal 2024 and then be at around 2 percent for fiscal 2025 and fiscal 2026.

The Bank of Japan's nine-member board is widely expected to vote unanimously to leave the overnight interest rate target in a range of zero to 0.1 percent for a second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote in March. The next rate hike is likely to be in July, September or October, when the board can confirm more evidence of how wage hikes are spreading to smaller firms and helping anchor inflation around the bank's 2 percent target in the longer term. Since the short-term rate is still very low, bank officials have stressed that the monetary conditions will remain accommodative for now. But Governor Kazuo Ueda has also said that if the depreciation of the yen pushes up import costs and thus inflation, having a huge impact that cannot be ignored,"it could cause a change in monetary policy."

The board is expected to discuss what to do with the bank's large-scale asset purchases in the process of normalizing monetary policy. The summary of the last meeting on April 25-26 meeting quoted one member saying that"one option is to reduce the bank's monthly purchase amount of JGBs (Japanese government bonds) -- which is currently about 6 trillion yen per month -- based on the supply and demand balance of JGBs, with the aim of restoring market functioning."

The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.

The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.

Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.

Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.