BoJ Hikes Rates to Highest Level Since 1995

The Bank of Japan has increased its policy rate by 25 basis points, therefore bringing it to 1.25%, which is the highest level observed since 1995. Passed by a 7-2 vote, this ruling marks the shortest interval between increases since the end of the negative-rate policy and the first one since June. Driven by the ongoing pass-through of increased salaries and wholesale costs to consumer pricing, the central bank said worries that underlying inflation could exceed its 2% target. The new rate is expected to start on September 24, 2026.

Although the market mostly expected the rate hike itself, attention now turns to Governor Ueda's following advice on possible future increases. Despite the rate adjustment, first market reactions suggested a weakening of the yen, which might mean that investors found the BOJ's forward guidance or the pace of tightening less harsh than they had expected.

For currency markets, USD/JPY may keep under pressure until more clear signs of more BOJ rises show themselves. Particularly over the short and medium terms, Japanese government bonds are also seeing increasing yield pressure. Moreover, if markets price in a quicker tightening cycle, volatility could rise across worldwide risk assets including stocks, emerging-market currencies, and cryptocurrencies; a slow rise in Japanese rates would lessen their attractiveness. Assessing the probability of another raise before year's end will depend much on the forthcoming news conference with Governor Ueda.