Another hike for BoJ

The Bank of Japan (BOJ) raised its short-term policy rate by 25 basis points to 1.0% yesterday. This is the highest level since 1995 (a 31-year high), marking the BOJ’s fifth hike since ending negative rates in March 2024. The decision was widely expected (markets had priced in ~90-100% probability) and passed by a 7-1 vote, with one dissenter citing downside risks to the economy. The move aims to address inflation pressures from elevated energy prices linked to the Iranian conflic, and the weak yen, while keeping financial conditions accommodative overall. The BOJ also maintained its bond purchase plans but signaled it would halt further tapering/reduction in JGB purchases from April 2027, keeping them steady at around ¥2 trillion monthly thereafter. Governor Kazuo Ueda was absent due to medical treatment. The market response was relatively muted, as the hike was widely anticipated. Yields rose (bonds sold off) as the decision and steady purchase guidance were seen as less supportive for bonds than some had hoped. The 10-year JGB yield increased notably (reports of ~6–8 bps higher intraday, trading around 2.64–2.66%) and the yield curve showed some bear steepening, but it’s now reversing the initial reaction and the long terms bonds are being bid. The Yen showed only modest gains before the pair stabilized or traded with a slight offered/weaker tone around the 160 level. Equities rose to new highs. It would look like the BoJ is using words to avoid yen intervention around the 160 level, waiting for the market to take the initiative. A currency intervention is likely if yen weakening is not controlled.

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