The Bank of Japan raised its benchmark rate a quarter point to 1.25%, the highest level since 1995, but the yen fell more than 1% anyway as two dissenting votes on the board raised doubts about further tightening. Governor Kazuo Ueda signaled a shift in focus toward containing inflation risks.
The Bank of Japan raised interest rates to a 31-year high of about 1.25% on Friday, yet the yen sank rather than rallied. The currency dropped more than 1% to ¥157.7 against the dollar following the decision, even as BoJ governor Kazuo Ueda struck a hawkish tone.
A split board undercuts the hike
The BoJ's policy board voted 7-2 for the quarter-point increase, lifting the target rate from 1% to about 1.25%. The Guardian reported the vote pushed borrowing costs to the highest level since 1995, with two board members dissenting.
A quarter-point increase had been largely priced in, so the dissenting votes cast doubt on the BoJ's appetite for further tightening. Analysts noted the two dissenters were both appointed by Prime Minister Sanae Takaichi, who favors reflationary government spending.
Ueda signals more hikes may follow
Despite the market reaction, Ueda framed the decision as a shift in the inflation fight. According to Ueda: "Our policy phase has changed." He said the BoJ now worries about underlying inflation overshooting its 2% target rather than falling short of it, and that he has no preset timetable for further moves.
Japan's finance minister Satsuki Katayama said separately that Tokyo would not hesitate to intervene again in currency markets, after deploying about $96 billion in July and August to support the yen.
Fed and ECB moves add pressure
The BoJ's hike follows the Federal Reserve's rate increase this week, to a range of 3.75% to 4%. The European Central Bank raised its own rate a quarter point to 2.5% last week. Citi economist Sosuke Nakamura said the Fed's move raises the odds of another BoJ hike this year, since Japan needs to narrow the interest rate gap with the US to relieve pressure on the yen.
Deutsche Bank strategist Jim Reid noted the yen traded 0.72% lower at 157.10, down from around 153.40 at the start of the week. Japan's 10-year bond yield held near 3%, its highest point in three decades.
Sources: Financial Times, The Guardian
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