Japan BOJ Raises Interest Rate to 0.25%... Highest in 15 Years
After 4 Months... US-Japan Interest Rate Gap Due to Inflation and Economic Recovery
Government Bond Purchases Reduced from 6 Trillion to 3 Trillion Yen Monthly Until Q1 2026
Growth Forecast for This Year Revised from 0.8% to 0.6%
The Bank of Japan (BOJ) decided to raise interest rates for the first time in four months at its monetary policy meeting on the 31st. NHK and Nihon Keizai Shimbun (Nikkei) reported that the policy rate, which had been between 0 and 0.1%, was raised to 0.25%.
Japan's short-term interest rate reached its highest level in 15 years and 7 months since December 2008, when it was around 0.3%. Nikkei explained that the BOJ judged that inflation and the economy were on an upward trend due to wage increases and other factors.
Earlier in March, the BOJ ended its negative interest rate policy by raising rates for the first time in 17 years. The subsequent two meetings kept rates unchanged, but with recent wage increases, inflation rising above 2%, and signs of economic recovery, the BOJ decided to raise rates again.
The recent weakness of the yen also appears to have influenced the decision. The yen-dollar exchange rate briefly reached the 161 yen level earlier this month. This was due to the interest rate gap between the United States and Japan widening as the U.S. Federal Reserve (Fed) delayed rate cuts.
The BOJ stated, "From the perspective of continuously and stably achieving the 2% inflation target, it was deemed appropriate to adjust the degree of monetary easing," adding, "If the economy and inflation continue to follow the BOJ's outlook, we will continue to raise policy rates and adjust the degree of monetary easing."
BOJ Governor Kazuo Ueda is scheduled to explain the rate decision at a press conference at 3:30 p.m. on the same day.
This additional rate hike was opposed by two of the nine BOJ policy board members. Board member Toyoaki Nakamura said that the decision should be made after reviewing corporate statistics at the September meeting. Board member Asahi Noguchi stated that it is necessary to carefully assess economic improvement data related to the spread of wage increases.
Additionally, the BOJ decided to reduce long-term government bond purchases from the current 6 trillion yen per month to 3 trillion yen in the first quarter of 2026. The plan is to reduce purchases by 400 billion yen each quarter in principle. The reduction will begin in August. The BOJ had announced the reduction of long-term bond purchases at last month's meeting.
The BOJ expects its government bond holdings, currently at 600 trillion yen, to decrease by 7-8% by March 2026 due to the purchase reductions.
In supplementary materials, the BOJ explained, "It is appropriate to reduce purchases in a predictable manner while securing flexibility to consider market stability." It also decided to conduct a mid-term evaluation at the June meeting next year. The BOJ stated that if long-term interest rates rise sharply, it will increase purchase amounts.
Nikkei reported that all policy board members agreed on the bond purchase reduction policy.
The BOJ also released a revised economic outlook report including economic growth and inflation. The forecast for the 2025 consumer price index (CPI, excluding fresh food) inflation rate was raised to 2.1% year-on-year, up from 1.9% announced in April. The 2026 forecast remains at 1.9%.
The 2024 forecast was lowered from 2.8% to 2.5% due to government subsidies on electricity and gas bills.
The real GDP growth rate forecast was revised down by 0.2 percentage points to 0.6% for 2024, while the forecasts for 2025 and 2026 remained unchanged at 1.0% each.
The BOJ expects that wage and price increases will form a virtuous cycle as wage hikes expand to small and medium-sized enterprises, maintaining inflation around the 2% target for the time being.
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On the day of the BOJ meeting announcement, the yen-dollar exchange rate fluctuated sharply, falling from the 152 yen level to 151.6 yen and then surging back to 153.6 yen. A decline in the yen-dollar exchange rate means a rise in the yen's value. Around 2 p.m. that day, the yen-dollar exchange rate was moving around 152.5 yen.
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