The Bank of Japan raised its policy rate 25 basis points to 1.25%, the highest level in over three decades, yet the yen weakened rather than rallied. Investors focused on a divided vote and the absence of explicit hawkish guidance rather than the hike itself.
The Bank of Japan lifted its policy rate 25 basis points to 1.25% on Friday, a widely expected move that signaled readiness for further tightening. The increase took borrowing costs to their highest level since 1995. Yet the yen weakened past 157 against the dollar, reversing the usual reaction to a rate increase.
A divided board undercuts the hike
Policymakers approved the increase on a 7–2 vote. Two board members, Toichiro Asada and Ayano Sato, preferred to hold the rate at 1%. Asada cited core inflation slowing from 1.8% to 1.7%, while Sato argued economic activity and prices had not accelerated enough to justify another move. The meeting also came without an updated quarterly outlook, and the statement stayed close to July's language, leaving investors who wanted a clearer signal of accelerated normalization disappointed.
Because the vote was not unanimous, markets reduced confidence in an immediate follow-up increase. The 10-year JGB yield fell 4.9 basis points to 2.947% after the decision. The Nikkei 225 also gained 1.38%.
Ueda cites the same inflation drivers as other central banks
Governor Kazuo Ueda said the bank's policy focus had shifted as underlying inflation approaches 2%, even as economic and price developments track the BoJ's baseline forecast. He pointed to a growing risk of inflation overshooting the target, a threat he said could hurt Japan's economy, and said stabilizing underlying inflation at 2% is now the central bank's primary task.
At his press conference, Ueda also kept the door open to further tightening. Asked about a larger move or consecutive increases, he said policymakers "shouldn't rule anything out", citing the Fed and ECB as examples of central banks acting preemptively. He added that the BoJ would quantify the economic impact of Friday's hike in its next quarterly report in October, meaning the October 30 meeting will carry fresh forecasts that Friday's decision lacked.
Sources: ActionForex, ActionForex
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