The Bank of Japan has announced plans to reduce its monthly bond purchases by half and increased its benchmark rate to 0.25 percent. This marks a significant shift in monetary policy.
This is a move that contrasts with the current stance of the US Federal Reserve and will likely narrow the interest rate differential which has contributed to the record weakness of the yen. The yen gained more than 1% in value against the dollar following the BoJ’s announcement on Wednesday. It now stands at Y=150.70.
Interest rates at the highest level since 2008.
The BoJ increased its overnight interest rate by 7-2 votes, making it the highest since the global financial crash of 2008. The rate previously ranged between zero and 0.1%.
This decision comes after the bank ended its negative interest rate policies in March, ending decades-long intermittent deflation.
The BoJ also announced plans to reduce its Y=6tn (39bn) monthly program of bond-buying to approximately Y=3tn in the spring 2026.
This reduction in the purchase of bonds signifies a move away from ultra-loose monetary policies.
Decisions are influenced by the economic conditions and inflation risk
Kazuo Ueda, the governor of the central bank, explained that rate decisions were influenced by economic conditions and price fluctuations which remained “on course.”
Ueda acknowledged the impact of the weaker yen on inflation played a part in the decision.
If economic conditions and inflation follow our forecast, we plan to raise our policy rate. We will also adjust the level of monetary accommodativeness.
Mixed reactions from economists, market participants
The BoJ’s decision has been met with mixed reactions by economists and traders. Some traders were evenly divided on the likelihood that a rate increase would occur, while others warned against such a move due to recent weak economic data.
In June, core inflation, which excludes volatile prices for food, increased 2.6% over the previous year, exceeding the BoJ’s 2% target in 27 consecutive months.
The decline of the yen and the rising cost of living negatively affected household spending, causing Japan’s economy to contract in the first quarter.
UBS economist Masamichi Adachi expressed his disappointment at the BoJ’s recent decision.
It is extremely disappointing that the BoJ chose to ignore weak economic data. It looks like the BoJ is trying to counteract the weak yen.
Adachi argued the BoJ decision had made the normalization of Japan’s economy even more difficult.
BoJ’s inflation prediction
The BoJ revised its forecast for consumer price inflation to 2.1% in the fiscal year that ends in March 2026. This is up from the previous forecast of 1.9% in April.
This adjustment reflects the bank’s concern about inflationary pressures caused by the weaker yen.
Stefan Angrick is a senior economist with Moody’s Analytics. He noted that the BoJ has shifted its focus to the yen’s effect on inflation.
He said that the central banks is “hiking in a weak economy”, without strong demand-driven price inflation.
I think that the BoJ should be clear about the fact they are changing the rules. They’re not winning.
He predicted that the next rate rise could occur in December, and suggested that the pressure on the BoJ may decrease once the US Federal Reserve begins to cut rates.
This post Bank of Japan increases interest rate to 0.25 %, cuts bond purchasing in major policy change may be modified as new updates unfold
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