On June 16, the Bank of Japan (BOJ) raised its key interest rate to 1% for the first time in 31 years, prompting a rally in the Japanese stock market. The Nikkei index briefly surpassed the 70,000 mark, but concerns lingered that the 1% rate may not be sufficient to curb inflationary pressures, leading to weakness in the foreign exchange and bond markets.
During its monetary policy meeting, the BOJ increased the target for the uncollateralized overnight call rate by 0.25 percentage points from approximately 0.75% to 1.0%. This marks the first time Japan's key interest rate has reached 1% since 1995. The decision was made with a vote of 7 to 1, with BOJ Governor Kazuo Ueda absent due to hospitalization for a viral infection.
The stock market reacted positively, with the Nikkei index rising for four consecutive trading days and reaching an intraday high of over 70,000 points. However, it closed at 69,404.50, up 87.00 points (0.13%) from the previous day. The anticipated rate hike reduced uncertainty, and a strong performance in U.S. tech stocks contributed to buying momentum.
Despite the stock market's gains, the foreign exchange and bond markets showed signs of weakness amid skepticism about the pace of future rate increases. In the Tokyo foreign exchange market, the yen traded around 160.30 yen per dollar, a slight increase of 0.20 yen from the previous day, indicating a decline in the yen's value. The perception that Japan's real interest rates remain low hindered yen purchases. In the bond market, concerns that the BOJ's policy response may lag behind inflation led to selling of long-term bonds.
The Nihon Keizai Shimbun (Nikkei) reported that if the BOJ's monetary policy falls behind inflation trends, it could trigger a 'Sell Japan' scenario, where both the yen and Japanese government bonds are sold off. The current 1% rate is still a topic of debate, and according to the BOJ's March estimates, the neutral interest rate (which neither overheats nor cools the economy) is between 1.1% and 2.5%. Former BOJ board member and Chiba Bank Research Institute President Eiji Maeda stated, "The actual lower bound the BOJ has in mind is around 1.5%," emphasizing that Japan's financial environment remains accommodative.
The BOJ indicated that it will continue to raise the policy rate and adjust the degree of monetary easing based on economic, price, and financial conditions, leaving the door open for further rate hikes. BOJ Deputy Governor Shinichi Uchida also reaffirmed the commitment to the rate hike path. In a press conference, he warned that the rapid pass-through of costs among businesses could lead to broader price increases at the consumer level, highlighting upside risks.
Looking ahead, the timing of the next rate hike will depend on the yen's depreciation and upward pressure on long-term interest rates. Currently, many analysts predict that the next increase could occur in December or January of next year, but if the yen weakens further or inflation accelerates, it could happen sooner. Kazuo Momma, an economist at Mizuho Research Institute and a former BOJ board member, noted that if pressures to sell Japan, such as yen depreciation or rising long-term interest rates, intensify, a rate hike could be brought forward to October.
* This article has been translated by AI.
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