Japan’s central bank raised its benchmark interest rate by 25 basis points to 1.25%, the highest level since 1995, in a move that stunned markets with its unconventional aftermath.
Rather than strengthening the yen and pushing bond yields higher, the Bank of Japan’s rate hike produced the exact opposite set of market reactions across the board.
The yen weakened past 157 against the dollar, the 10-year Japanese Government Bond yield slipped, and the Nikkei 225 climbed 1.5% following the central bank’s decision.
The hike came just three months after the BOJ’s previous increase, marking a faster pace of tightening that many analysts had not fully anticipated heading into Friday’s decision.
Experts attributed the counterintuitive market reaction largely to a split vote within the BOJ’s board, which signalled the bank may not adopt an aggressively hawkish stance going forward.
“The two dissenting votes in favor of keeping rates unchanged came as a surprise,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation.
The decision passed 7-2, with board members Toichiro Asada and Ayano Sato both voting against the rate increase, citing concerns about the underlying strength of the Japanese economy.
Asada argued that with Japan’s core inflation rate sitting at 1.7% in August, down from 1.8% in July and still below the 2% target, the economic situation did not justify a hike at this stage.
Sato similarly argued that current economic and price developments did not appear to have substantially accelerated compared to before the previous rate decision.
The absence of an updated outlook report alongside the hike also limited the BOJ’s ability to reinforce a hawkish message through revised forecasts, according to Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s “Access Middle East” that the two dissenters signalled Prime Minister Sanae Takaichi was not convinced to accede to the U.S.’ request for faster and more rate hikes.
Reuters reported that U.S. Treasury Secretary Scott Bessent had stressed the need for higher BOJ rates during his meeting with Japanese Finance Minister Satsuki Katayama in May.
“If we look at the statement, all the phrases and the tone was almost similar to what we saw in the quarterly outlook report published in July, so the tone was less hawkish than financial markets had hoped for,” Nagai added.
Markets are now turning their attention to what comes next, with another rate hike widely expected around December if economic conditions continue to develop in line with the BOJ’s projections.
Loo said he expects BOJ Governor Kazuo Ueda to emphasise that every forthcoming meeting remains “live,” adding that “the debate is no longer whether the BOJ hikes, but how far rates ultimately go.”
The BOJ acknowledged that growth was likely to decelerate due to high oil prices stemming from the Middle East conflict, even as it committed to continuing its rate-raising path.
Sam Jochim, economist at EFG International, expects rates to rise roughly once every three months as underlying inflation approaches 2%, forecasting a terminal rate of between 1.75% and 2% by 2027.
Stefan Angrick, head of Asia-Pacific economics at Moody’s Analytics, expects another increase around the turn of the year but warned that weak demand-driven inflation and disappointing real-wage growth would limit how far the BOJ can ultimately go.