Bank of Japan (BOJ) Raises
Interest Rate to 0.25% in Aggressive Move
Bond
purchases will be cut by half in the coming two years
The
Bank of Japan on Wednesday announced an interest rate increase and a bond tapering
plan, in an aggressive move that signals the central bank's growing confidence in
the recovery of the domestic economy and its concern about the sharply weaker yen.
In
a two-day policy meeting, the BOJ said it will guide the uncollateralized overnight
call rate to 0.25% from between 0% and 0.1%, in the second rate rise this year following
the one on March 19 when the central bank lifted a negative interest rate policy
and ended equity purchases and yield curve controls.
"Japan's
economic activity and prices have been developing generally in line with with the (BOJ's own) outlook," the central bank said in
a policy statement to justify the move, which was not anticipated by the majority
of market players.
Only
26% of market players expected a rate rise, according to a survey of 181 bond investors
conducted by Nikkei affiliate QUICK on July 23-25. Most investors expected a rate
increase to take place either in September or October.
"The
BOJ appeared to have kept its intentions under wraps to avoid raising expectations
for policy tightening," said Tomoaki Shishido, rates
strategist at Nomura. He believes that the rate hike was aimed, at least in part,
at supporting Japan's embattled currency. "The idea of a rate hike may have
been in the works since the suspected currency market interventions on July 11-12,"
he said.
The
bank also announced a plan to taper its purchases of Japanese government bonds (JGBs).
Monthly purchases will be reduced to 3 trillion yen by the first quarter of 2026
compared with the current pace of 6 trillion yen.
To
make the tapering process as predictable as possible, the BOJ said purchase amounts
will be reduced by about 400 billion yen every quarter.
As
of March, the BOJ had accumulated 576 trillion yen worth
of JGBs, or 53% of the total outstanding debt of the Japanese government, under
an aggressive "quantitative easing" program launched in 2013. Following
the tapering program, the central bank is expected to remain the biggest holder
of JGBs in the coming years.
The
BOJ said on June 18 that it would lay out details on the tapering plan at the July
meeting. "There was no surprise in the tapering plan," Nomura's Shishido
said, noting that the size and the timeframe of the reductions were exactly in line
with what the market had anticipated.
Hideo
Kumano, chief economist at the Dai-ichi Life Research
Institute said that the plan indicates the BOJ is striving to make the operations
as smooth as possible.
In
a separately released economic outlook report, the BOJ projected consumer inflation
would be 2.1% for fiscal 2025 and 1.9% for fiscal 2026, indicating that consumer
prices are on track to achieve its 2% target on a sustained basis.
The
BOJ signaled further rate hikes are in the cards. "[G]iven that real interest rates are at significantly low levels,"
it said in the policy statement, "if the outlook for economic activity and
prices presented in the July Outlook Report are realized, the Bank will accordingly
continue to raise the policy interest rate and adjust the degree of monetary accommodation."
The
central bank's gradual approach compares with a rapid tightening by the U.S. Federal
Reserve, which jacked up policy rates by 5.25 percentage points between 2022-2023.
The large interest rate differential has sparked an outflow of capital from Japan
to the U.S., leaving the yen close to 162 against the U.S. dollar this month, a
37-year low and down almost 30% since the beginning of 2022.
Japan's
currency authorities were believed to have conducted yen-buying interventions in
the currency market earlier this month. Later on Wednesday,
the Ministry of Finance will release a monthly report on yen interventions, allowing
investors to verify the country's market actions.
Most
economists had expected the BOJ to hold off on a rate hike in July, reckoning that
the BOJ would prefer to wait until it is confident about a recovery in private consumption.
Japan's
personal spending has been slowing for four straight quarters as wage growth has
been outpaced by inflation for more than two years. The sluggish consumption is
blamed for an uneven performance of the Japanese economy, which contracted twice
in the last three quarters.
Economists
expect that real wages will turn positive by around August, by which time a record
3.56% pay increase agreed between businesses and labor
unions in March is expected to be mostly reflected in paychecks.