NIKKEI225: BoJ Surprise Rate Hike After Calls to Defend Weak Yen

The BoJ unexpectedly increased the main interest rate from 0.10% to 0.25% and outlined the tapering of the bond purchasing program.

The central bank had received requests from various government officials to hike rates in order to protect the declining yen. All the same, the market was widely expecting the BoJ to take action at the next meeting in September.

Nevertheless, the NIKKEI225 jumped over 2% at one point as the unexpected hike in rates was offset by a slow paced JGB purchases tapering plan

The reasoning for a delay in hiking rates was that the central bank would have preferred to see enough data to consider the economy was strong enough before taking action to tighten money supply.

In a policy statement after the meeting the BoJ highlighted that “economic activity and prices have been developing generally in line with the outlook”. Justifying its move in hiking interest rates.

Backing up the claim is data for Retail Sales, which increased YoY to 3.7% from 2.8% in June. The government had also expressed concerns about personal consumption creating a drag on economic growth.

The USD/JPY fell from 152.58, before the announcement, to 150.58 at the time of writing. Many carry trades are being un-winded as the interest rate gap narrows.

The market is also expecting that government influence may continue to push the BoJ to take action if the yen doesn’t recover more of the lost ground.

Bond Purchasing Program & Future Hikes

The reduction in the bond purchasing program was also outlined at the monetary policy meeting. The BoJ will reduce the bond purchases by half over two years. The BoJ will reduce monthly purchases of JGBs by ¥3 trillion in the first quarter of 2026.

JGB 10-year yields jumped from yesterday’s close at 1.001% to 1.069% at one point. The jump isn’t particularly significant. As mentioned previously the BoJ had met with market participants to agree on a tapering plan that would not cause great disruption.

The BoJ also mentioned that further hikes are in the pipeline if the economy proves strong enough.

“If the outlook for economic activity and prices presented in the July Outlook Report are realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.”

The comment above from the post-meeting statement clearly presents the possibility of another rate hike in September. Always if the data supports a strengthening economy and contained inflation.