The BOJ's nine-member Policy Board approved the increase in a 7-2 vote at the end of its two-day monetary policy meeting, with board members Toichiro Asada and Ayano Sato opposing the hike.
The move marked the BOJ's first rate increase since June, when it raised the short-term policy rate from 0.75 percent to 1.0 percent, extending its gradual withdrawal from decades of ultra-loose monetary policy.
The 1.25 percent level was last seen in April 1995 under the BOJ's former discount-rate framework. The central bank lowered its official discount rate that month before cutting it again in September 1995.
The widely expected decision came as the BOJ seeks to contain the risk of inflation moving back above its 2 percent target. Markets had priced in about an 83 percent probability of a rate increase ahead of the meeting, putting greater focus on the pace of further tightening and Governor Kazuo Ueda's guidance.
The Korean won weakened around the announcement. The dollar-won exchange rate rose to around 1,385 won by 12:18 p.m. from around the 1,380-won level earlier in the morning. The pair had fallen as low as 1,379.02 earlier in the session.
Korean government bonds had been broadly stronger at the morning close. The three-year yield fell 2.9 basis points to 4.034 percent, while the benchmark 10-year yield dropped 5.4 basis points to 4.452 percent and the 30-year yield declined 3.3 basis points to 4.574 percent.
Further moves in both foreign exchange and bond markets could depend on Ueda's post-meeting remarks, with investors looking for clues on how quickly the BOJ intends to raise rates further. Ueda is scheduled to hold a press conference at 3:30 p.m. Friday.
AJP TAKEAWAYS
- A 25-basis-point hike lifted the BOJ's benchmark rate to 1.25 percent, its highest level since April 1995.
- The 7-2 decision marked Japan's first rate increase since June, while markets shifted their attention to Ueda's guidance on the pace of further tightening.
- In Seoul, the dollar-won rate climbed to around 1,385 shortly after the decision, while Korean government bond yields had fallen broadly at the morning close.
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