BOJ’s Policy Interest Hike Accelerated

The Bank of Japan decided to raise its policy rate from 1.0 percent to 1.25 in the Monetary Policy Meeting held on September 17th and 18th. The BOJ Governor, Kazuo Ueda, announced that the bank recognized change of policy phase from targeting price inflation toward 2 percent to stabilizing it at 2 percent, considering a risk of upward pressure. However, he did not make future moves clear, causing some disappointments of the markets. 

Since it started raising its policy interest rate in March 2024, the BOJ kept on adding by 0.25 percent approximately every half year. This time, however, the bank decided policy interest hike after three months from previous one. It can be regarded as an acceleration of interest hike. The rate reached the highest level since 1995. The decision was made with majority approval of seven members out of the nine.

 

The bank stresses importance of stabilizing price inflation at the level of 2 percent. The BOJ’s “outlook” on economic activity and prices in Japan explains that its policy is “in order to keep the risk of underlying CPI inflation deviating upward to a level above the price stability target of 2 percent from materializing and thereby exerting an advise impact on the economy afterward,”

 

The outlook also analyzes the risks with attention to situation in the Middle East, expansion in AI-related demand and developments in foreign exchange rates. “There is a risk that it will deviate upward to a level above the price stability target of 2 percent,” it says. The BOJ unequivocally declares that it will continue to raise the policy interest rate and adjust the degree of monetary accommodation.

 

The markets have acknowledged that the bank will continue to raise the rate. The question is how fast. Probably knowing the expectation to further interest rate hike within next three months or greater margin of jumping up, Ueda did not give reporters any hint about future moves. “It depends on situation of price and I would not exclude any specific method,” Ueda said. Receiving his unclear message, the foreign exchange moved to depreciation of Japanese yen, immediately after Ueda’s press conference.

 

It is at least said that the BOJ’s policy interest rate entered within a range of so-called neutral rate of interest, which neither heat nor cool economy. The BOJ has set a range of the neutral rate of interest between 1.1 percent and 2.5 percent. 1.25 percent of policy interest rate falls within the range. It can be another indicator for the BOJ to stabilize underlying CPI inflation at 2 percent.

 

The BOJ insists that it was nothing but its own decision. However, it is undeniable that the bank has been facing a pressure for raising its policy interest rate from the United States. U.S. Secretary of Treasury, Scott Bessent, told that Japan should stop the reflation policy, which has been taken by Japanese government since former prime minister Shinzo Abe introduced. Regardless that it had given in to the U.S., the BOJ seemed to have no choice but raising the policy interest rate in the situation of price inflation, which seriously affects companies and households.

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