The Bank of Japan surprised markets when it announced its decision to raise interest rates by 0.15% from <0.10% to <0.25% while policymakers agreed to reduce bond purchases to 3 trillion yen by the first quarter of 2026.
In effect, this would reduce quarterly bond purchases to about 400 billion yen, with the pace of tapering subject to a mid-year review by June next year.
In their official statement, Bank of Japan policymakers noted that the Japanese economy was recovering moderately and that core inflation was expected to ease gradually. However, they noted some weak spots as high prices continue to weigh on consumption.
Link to the Bank of Japan’s official monetary policy statement for July
The Bank of Japan’s quarterly outlook report shed more light on the central bank’s assessment of growth and inflation trends, with real GDP and CPI forecasts revised slightly downward while “core” inflation estimates for 2025 and 2026 remained mostly unchanged.
Link to the Bank of Japan’s Quarterly Forecast Report
Two policymakers, Nakamura Toyoaki and Noguchi Asahi, expressed their opposition to the decision to cut borrowing costs, with the latter noting that “It was necessary to make a more accurate assessment of the extent to which the economic situation had improved in light of the widespread wage increases.”
During the press conference, Governor Ueda noted that some policymakers have expressed concerns about the economic outlook, but he also stressed that rising wages could continue to support private consumption despite high price pressures.
Japanese Yen vs Major Currencies: 5 minutes
Japanese Yen Overlay Against Major Currencies Chart by TradingView
The yen pairs were mostly consolidating a few hours before the actual BOJ statement, before a sharp decline followed. From juice Before the event. There was talk about Bank of Japan decision leaked to press overnightwhich likely explains the volatile price action ahead of the announcement.
However, the Japanese currency generally rose after the rate hike decision, even recovering back above pre-BoJ levels against most of its foreign currency counterparts just before the press conference.
Relatively gloomy comments by Bank of Japan Governor Ueda, suggesting the central bank may remain on hold in the near term, forced the yen back down, especially against the Swiss franc and the Canadian dollar.