TEMPO.CO, Tokyo - The Bank of Japan raised interest rates in a mostly unexpected move on Wednesday, July 31, and unveiled a detailed plan to slow its massive bond-buying, taking another step towards phasing out a decade of huge stimulus.
The decision, which defied dominant market expectations for the BOJ to stand pat on rates, takes its short-term policy rate to levels unseen since 2008.
BOJ Governor Kazuo Ueda did not rule out another interest rate hike this year and signaled the bank's readiness to steadily hike borrowing costs to levels deemed neutral to the economy in the coming years.
The hawkish comments pushed the dollar below 151 yen for the first time since March, as markets awoke to the reality that Japan was finally eyeing a full-fledged rate hike cycle.
Japan's shift to tighter monetary policy also contrasts sharply with the broad swing to lower interest rates by other major economies, with the Federal Reserve expected to signal later on Wednesday that it will cut rates in September as U.S. price pressures moderate.
"If data shows economic conditions are on track, and if such data accumulates, we would of course take the next step," Ueda told a news conference when asked about the chance of another rate hike this year.
"By raising rates from very low levels and adjusting the degree of stimulus gradually, we can avoid the risk of having to make big adjustments in a short time," he said.
At the two-day meeting ending on Wednesday, the BOJ's board decided to raise the overnight call rate target to 0.25% from 0-0.1% in a 7-2 vote.
It also decided on a quantitative tightening (QT) plan that would roughly halve monthly bond buying to 3 trillion yen ($19.6 billion), from the current 6 trillion yen, as of January-March 2026.
Ueda said the BOJ decided to raise rates not just because inflation was moving in line with its forecast but risked overshooting its projection due partly to rising import costs from a weak yen.
"If the economy and prices move in line with our projection, we will continue to raise interest rates," Ueda said. "In fact, we haven't changed much our projection from April. We don't see 0.5% as any key barrier when raising rates."
The yen rallied to 150.88 to the dollar on Ueda's comments in choppy trade.
"Despite sluggish consumer spending, monetary officials sent a decisive signal by raising interest rates and allowing for a more gradual balance sheet reduction," said Fred Neumann, chief Asia economist at HSBC.
"Rising inflation expectations also open the path for ongoing monetary policy normalization by the BOJ. Barring major disruptions, the BOJ is on course to tighten further, with another interest hike by the start of next year," he said.
