Bank of Japan on Friday raised its benchmark interest rate by a quarter point to 0.75%, marking the highest level in three decades. Yet, in a classic display of market whimsy, the yen promptly weakened, as traders apparently craved bolder signals from Governor Kazuo Ueda.
The unanimous decision underscored the central bank’s quiet confidence in sustained wage growth and fading risks from U.S. tariffs under President Trump. All 50 economists polled by Bloomberg had called it correctly, proving once again that predictability can be the ultimate plot twist in finance.
Markets reacted with the enthusiasm of a cat watching a laser pointer that’s run out of batteries. The yen dipped past 157 against the dollar after Ueda’s press conference, where he politely declined to pin down the elusive neutral rate, estimated somewhere between 1% and 2.5%.
Japanese government bond yields, however, perked up noticeably. The 10-year benchmark climbed above 2% for the first time since 1999, reminding borrowers that even modest hikes can nudge borrowing costs in unwelcome directions.
Meanwhile, the Nikkei 225 closed 1% higher earlier in the day, as if stocks decided to celebrate the hike before anyone else got the memo.
Inflation data released the same morning showed a key consumer price gauge at 3% in November, extending the streak above the BOJ’s 2% target to 44 months. Households felt the pinch from higher import costs, courtesy of the weaker yen – a gentle reminder that currency moves cut both ways.
Governor Ueda’s policy board cited solid wage momentum from recent labor talks, where unions held firm on demands similar to last year’s historic gains.
The central bank vowed to keep raising rates if its outlook holds, noting underlying inflation continues its moderate ascent.
Ueda told reporters that decisions would come meeting by meeting. The pace, he added with a straight face, depends on economy and prices – words that left traders parsing for hidden enthusiasm that simply wasn’t there.
One economist quipped that Ueda’s comments almost suggested the hiking cycle might doze off soon. Another noted the BOJ still views rates as “significantly low,” hinting at more room upstairs.
Former BOJ officials weighed in predictably. One forecasted hikes every six months or so, perhaps two in 2026 and one in 2027, landing around 1.5%.
Prime Minister Sanae Takaichi, who assumed office in October amid doubts about her easing preferences, stayed silent on the move. Political pressures from yen weakness and inflation apparently outweighed any urge to meddle.
Ueda emphasized alignment with the government’s 2013 accord on 2% inflation. Accommodative conditions, he assured, would persist to support growth – a nod to avoiding friction in Tokyo’s corridors of power.
This hike marked the first unanimous vote under Ueda, after recent dissents from hawkish board members pushing for faster action.
The decision followed clear hints dropped earlier this month, a far cry from the July 2024 surprise that rattled global markets.
Recent yen depreciation, hitting 10-month lows, likely prompted the advance warnings. Authorities had issued stern looks as it neared the 160 threshold.
Japan stands alone among major central banks in raising rates this year. The Federal Reserve, by contrast, cut for the third time last week.
Even post-hike, Japan’s rate lags its inflation, while U.S. costs exceed price growth there. Convergence, it seems, happens at a deliberately glacial pace.
Wage talks loom large, with momentum intact despite external uncertainties.
Ueda admitted pinpointing the neutral rate remains tricky. Current levels sit below the estimated floor, leaving ample headroom without rushing.
Bond markets stirred more than currencies. Yields on longer maturities hit highs not seen in decades, signaling investor bets on gradual normalization.
Public grumbling over living costs contributed to electoral setbacks before Takaichi’s rise. A weak yen risks amplifying those pressures via pricier imports.
Analysts now eye communications between Ueda and the new administration. History from the 2000s offers cautionary tales of political backlash against hikes.
For now, the BOJ marches forward, outlier in a world of easing peers. Inflation embeds itself after decades of dormancy following the 1990s bubble burst.
The path ahead: measured steps, data-dependent decisions, and perhaps a few more market sighs along the way.
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