• Bank of Japan raises benchmark rate to 0.25%.
• It also announced a reduction in purchase of Japanese government bonds.
• Japanese Yen is sharply higher against the US Dollar.

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Bank of Japan Tightens Policy 

The Bank of Japan (BoJ) concluded a two-day meeting earlier today. The central bank tightened monetary policy on two fronts – a rate hike and announcement of a taper in bond purchases.

In what was considered an aggressive move, the BoJ raised the benchmark rate to “around 0.25%”, up from the previous range of 0% to 0.1%. This brings the benchmark rate to its highest level since 2008. The move was somewhat of a surprise as the markets were uncertain if the BoJ would raise rates at all, and the 0.15% hike was considered a hawkish move by the central bank.

Although interest rates remain very low in Japan compared to other major economies, the move is nonetheless significant. The BoJ raised rates in March, which marked an historic shift from a negative interest rate policy. Today’s move indicates that the BoJ remains an outlier, as other central banks have lowered rates or are planning to do so in the era of lower inflation, while the BoJ is moving in the opposite direction.

Can we expect further rate hikes from the Bank of Japan? The rate statement was dovish and appeared to dampen any such expectations. The statement said that the BoJ expects real interest rates to remain “significantly negative” and that it will continue an accommodative monetary policy in order to support the economy. Still, if inflation and wage growth continue to rise, the BoJ may have no choice but to continue raising rates.

Reduction in Bond Purchases 

The BoJ also announced that it would reduce its purchases of Japanese government bonds (JGBs) by around 400 billion yen ($2.6 billion) each quarter. This is a relatively minor reduction, as it will bring down its massive holding of JGBs by only 7% by 2026. Although it is only a small step, it indicates that the BoJ is slowly tightening policy, which is a major shift after decades of ultra-loose monetary policy.

Japanese Yen, Stock Market Jump After BoJ Decision 

The Japanese yen has reacted very favorably to the BoJ rate decision. The USD/JPY currency pair declined by as much as 1.79%, falling as low as 150.05 before retracting. This marked its lowest level since March 19.Currently, USD/JPY is trading at 150.36, down 1.54% on the day.

The main Japanese stock index, the Nikkei 225, also surged higher today. The index rose 575 points (1.49%) to close at 39,101.

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