The Bank of Japan increased its policy rate by 25 basis points to 1% on Tuesday. Thus, the benchmark interest rate in the country rose to the highest level seen since the mid-1990s. The decision pointed out that Japan’s gradual exit from the loose monetary policy it has been implementing for a long time is continuing.
The decision was taken by a vote of 7 to 1.
The interest rate increase was a step that most of the market expected. The decision was approved by the board with a vote of 7 to 1. Bank of Japan Governor Kazuo Ueda did not attend the meeting because he was being treated in the hospital for an infected hepatic cyst. The person expected to make a statement to the press after the meeting was Vice President Shinichi Uchida.
Toichiro Asada, who joined the board in April, stood out as the only member opposing the decision. It was reported that Asada’s objection was based on the view that conflicts in the Middle East could pose a greater risk to economic growth than inflation.
The Bank of Japan has assessed that companies are reflecting rising oil costs unusually quickly throughout the supply chain, which could trigger broader price increases across many product groups.
Energy prices and weak yen were effective
One of the main factors behind the decision was rising energy prices linked to Middle East tensions. Japan, which is dependent on foreign oil and natural gas, feels the pressure of increasing commodity costs on domestic prices more clearly. The central bank also pointed out that medium and long-term inflation expectations are moving upwards.
The depreciation pressure on the yen also strengthened this picture. While the Japanese currency was hovering around 160 yen against the dollar, it was evaluated that the low interest rate environment further increased import costs. In contrast, officials noted that public measures to support household energy costs and progress in alternative energy supplies have reduced the likelihood of a sharp economic contraction driven by regional tensions.
First reaction in the markets
Following the decision, the Nikkei 225 index rose nearly 1% and briefly rose above 70,000 points. Market commentators viewed the absence of a sharper increase of 50 basis points as positive for risk appetite. SMBC chief currency strategist Hirofumi Suzuki said the central bank could follow a more cautious tightening path, with increases likely to come about six months to a year apart.
According to SMBC’s Hirofumi Suzuki, the fact that the board did not propose a stronger increase of 50 basis points gave a more measured tightening message for the markets.
There was pressure in the cryptocurrency market after the announcement. It was stated that sales accelerated, especially in Bitcoin. The news reminded that Bitcoin fell between 20% and 30% after the previous four interest rate increases in Japan. It was stated that behind this move there were concerns about the resolution of transactions that focused on borrowing at low yen costs and turning to higher-yielding assets.
The central bank also announced that it will halt its plan to reduce bond purchases from April next year. The institution will continue to purchase government bonds worth approximately 2 trillion yen per month. Authorities stated that annual evaluations of the reduction strategy will end, but purchase amounts may be changed in subsequent meetings if deemed necessary.
