JP: Bank of Japan Announcement

Highlights

The Bank of Japan’s nine-member board decided to raise the target for the overnight interest rate to 1.25% from 1% in a 7 to 2 vote, warning that elevated energy prices caused by the Iran war could spread to a wide range of goods and services and push up underlying inflation above the bank’s 2% price stability target. The bank’s sixth rate hike in the current cycle at this timing was widely expected and follows no change in July and a 25-basis point (0.25 percentage point) rise in June.

The board repeated that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.

Market participants expect the bank to raise rates again in December or January, which would be its seventh hike in the normalization process that began in March 2024 under Governor Kazuo Ueda’s leadership to gradually unwind large-scale monetary easing that lasted for about a decade since April 2013. The BOJ repeated that the timing and pace of future rate hikes depend on how their medium-term economic outlook is affected by three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence and fluctuations in foreign exchange rates.

“As for underlying CPI inflation, there is a risk that it will deviate upward to a level above the price stability target of 2%, given factors such as firms' behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations rising,” the board said in a statement. Given that real interest rates are still low and financial institutions are proactively lending, the board expects “accommodative” financial conditions to be maintained after the latest rate hike, which should continue to “firmly support economic activity.”

Board member Toichiro Asada, a former economics professor who is known to hold reflationary views, called for no change in policy at the Sept. 17-18 meeting, arguing that the recent year-on-year increase in the core consumer price index (excluding fresh food) has been below the bank’s 2% target and that the current economic conditions are not necessarily strong. He also dissented at the June 15-16 meeting. Another former professor, Ayano Sato, who joined the board on June 30, also dissented, saying a rate hike at this point would “not be appropriate” as economic growth, inflation do not appear to have “substantially accelerated.”

Both Asada’s and Sato’s appointments by the government reflect the wishes of Prime Minister Sanae Takaichi who has voiced opposition to rate hikes in the past.

At the opposite end of the spectrum are Hajime Takata, a former executive at Mizuho Securities, and Naoki Tamura, who came from the Sumitomo Mitsui Financial Group. Both of them joined the board in July 2022 and have urged a faster pace of policy normalization. In June, Takata called for an immediate rate hike to 1.25%, arguing that the central bank has entered a new phase in which it needs to nimbly respond to upside risks to inflation caused by “demand shocks” from overseas and to changes in overseas financial conditions.

The bank stuck to its projection given in its quarterly Outlook Report issued after the July 30-31 meeting that between the second half of fiscal 2026 and fiscal 2027 that ends in March 2028, underlying CPI inflation should increase gradually and will be “at a level that is generally consistent with the price stability target” and remaining at around that level thereafter. Takata and Tamura opposed the official inflation outlook, saying the BOJ has largely achieved the inflation target.

The BOJ also maintained its risk analysis in the July report: Risks to economic growth are “generally balanced while those to inflation remains “skewed to the upside.”

Market Consensus Before Announcement

The Bank of Japan’s nine-member board is widely expected to raise the target for the overnight interest rate to 1.25% from 1% in a majority or unanimous vote as it has warned that elevated energy prices caused by the Iran war could spread to a wide range of goods and services and push up underlying inflation above the bank’s 2% price stability target. It would be the bank’s sixth rate hike in the current cycle and follow no change in July and a 25-basis point (0.25 percentage point) rise in June.

The board is expected to repeat that underlying inflation is"nearing" the bank’s 2% price stability target and that financial conditions are still"accommodative" to economic activity. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.

The focus is on whether the board will tweak its long-held statement that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation

Board member Toichiro Asada, a former economics professor who is known to hold reflationary views, may vote against a rate hike. He did so in June, arguing that downside risks to production and employment were greater than upside risks to inflation. His appointment earlier this year reflects the wishes of Prime Minister Sanae Takaichi who has voiced opposition to rate hikes in the past.

Market participants expect the bank to raise rates again in December or January, which would be its seventh hike in the normalization process that began in March 2024 under Governor Kazuo Ueda’s leadership to gradually unwind large-scale monetary easing that lasted for about a decade since April 2013.

BOJ policymakers have said the timing and pace of future rate hikes depend on how their medium-term economic outlook is affected by three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence and fluctuations in foreign exchange rates.

The BOJ is expected to repeat its projection given in its quarterly Outlook Report issued after the July 30-31 meeting that between the second half of fiscal 2026 and fiscal 2027 that ends in March 2028 underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be “at a level that is generally consistent with the price stability target” and remaining at around that level thereafter.

Definition

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.

Description

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.

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