TOKYO - The Bank of Japan decided at its monetary policy meeting on June 16 to raise its policy rate to around 1.0 percent from around 0.75 percent, a move that was widely expected.
The central bank is continuing to adjust its massive monetary easing measures after ending negative rates in March 2024 amid growing inflation concerns fueled by higher crude oil prices and a weaker yen.
Because those factors had already been flagged at the previous meeting in April, it is hard to shake the feeling that the rate hike came late.
While the policy rate has reached its highest level since 1995, markets had largely priced it in and attention has shifted to where rates go next. With the real policy rate still negative after subtracting inflation, financial conditions remain accommodative. The hike is unlikely to put the brakes on the economy.
With the June 16 meeting ending without turmoil and reassurance spreading through markets, the Nikkei Stock Average index surged, closing above 71,000 for the first time two days later. It seems the hike is being taken positively because it is part of a normalization process aimed at curbing inflation.
The Nikkei topped 60,000 in April and climbed into the 71,000 range in less than two months, suggesting signs of overheating. Stocks tied to artificial intelligence and semiconductors have risen partly on expectations. While a correction would not be surprising, a clear trigger has been hard to find.
Tensions in the Middle East that drove crude oil prices higher have eased for now after the United States and Iran agreed on a memorandum toward ending hostilities. If the fighting truly ends, inflationary pressure stemming from supply fears could subside and one downside risk to the economy would diminish, providing a tailwind for the BOJ as it proceeds with further normalization.
The central bank is expected to hike again in October, with the key policy rate expected to reach around 1.25 percent and possibly to around 2.0 percent by the end of next year. If that happens, the real policy rate would be around zero, given the central bank's goal of stabilizing inflation at 2.0 percent year on year to achieve monetary normalization.
The BOJ also decided to halt measures from April next year to reduce its purchases of Japanese government bonds. With long-term interest rates trending higher recently amid factors including the proactive fiscal stance of Prime Minister Sanae Takaichi's government, halting the reduction is expected to help stabilize the bond market.
(Koji Fukaya, born in 1962, has served as a fellow at Market Risk Advisory Co. since 2012. He graduated from the University of Tokyo's Faculty of Law, joined Mitsubishi Bank, a predecessor of MUFG Bank, and worked at firms including Deutsche Securities.)
