Bank of Japan increase the policy rates by 15 bps; plans quantitative tightening by halving monthly bond buying to JPY 3 trillion from existing JPY 6 trillion

 Bank of Japan in it’s meeting today has increased the benchmark long term rates from 0.1% to 0.25% (increase of 15 bps against the market expectation of 10 bps). The BOJ hiking today is already as hawkish as they have been since pre-Kuroda 2011. Even the voter breakdown of the decision (7-2) is hawkish. And added to that, comments that they "will keep raising policy rate if price outlook materializes" implies that hiking is now their base case even with their CPI projections effectively not hitting below 2 pct until 2026.

 The JPY has strengthened vis-à-vis USD post the policy announcement and has risen to 151.97 (0.5% appreciation).

 The other key observations were as under:

 

1. The Core CPI for FY 25 is estimated to be at 2.1% (against the previous assessment of 1.9%) driven the increased interest rate and liquidity tightening. The consumption has remained relatively resilient even amongst the rising prices.
2. Wages increases are seen at significantly higher level compared to last year.
3. GDP forecast is revised downward to 0.6% vis-à-vis earlier estimate of 0.8%
4. The monthly JGB buying is expected to reach JPY 3 trillion by Q4FY25 (Jan-Mar’26) from the current level of 6 trillion  per month thereby further

 

Ueda  (governor) has said the BOJ would hike rates further if it became convinced rising wages would prop up services prices and keep inflation durably around its 2% target.

 

We expect the JPY to gain further in the current scenario where global central banks are looking at reducing interest rate with market expectation of rate cut by US Federal Reserve in Sept’24 policy meet.