Bank of Japan raises benchmark rate to 1% in 7-1 vote, governor absent; yen trims gains
The Bank of Japan raised its benchmark rate by a quarter point to 1% on Tuesday, the highest since 1995, as policymakers voted 7-1 without Governor Kazuo Ueda, who is hospitalized with a liver cyst. The yen briefly strengthened before paring gains, while bond futures slid.
The decision
The Bank of Japan lifted its policy rate by 25 basis points to 1% on Tuesday, taking borrowing costs to their highest level since 1995. The seven-to-one vote came at a meeting convened without Governor Kazuo Ueda, who is receiving treatment for an infected liver cyst. The BOJ signalled that further policy normalization lies ahead, with plans to stop paring its bond purchases.
Market reaction
The yen initially firmed to 160.05 per dollar after the announcement, before trimming gains to trade at 160.21. Bond futures held losses as traders digested the hawkish tilt. The rate had been near zero for two decades, and the BOJ only began raising it in March 2024, ending a 17-year freeze.
Governor's absence
Ueda, a central figure in the rate decision, missed the meeting for the first time since taking office. He had signalled support for tighter policy in recent weeks.
Even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate.
Inflation and energy pressures
Wholesale prices in Japan climbed more than 6% in May from a year earlier, the fastest pace in three years. The surge in global energy prices, driven in part by the Iran war, has fuelled inflation in the import-dependent economy. Still, consumer inflation in April ran at 1.4%, below the BOJ's 2% target.
After twenty years of deflation, Japan is now in an inflationary upcycle. Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy.
Political context
Prime Minister Sanae Takaichi, a proponent of fiscal expansion, has previously dismissed the idea of rate hikes. She has not publicly criticised Tuesday's move, though she faces pressure to bring down living costs. The BOJ's trade-off is delicate: higher rates help tame inflation but raise borrowing costs for the government and businesses.
