According to the Nihon Keizai Shimbun and other outlets, the BOJ decided at its monetary policy meeting on Wednesday to raise its target for the benchmark rate — the uncollateralized overnight call rate — by 25 basis points to around 1.25% from around 1.0%. That is the highest level since 1995, a span of 31 years.
The increase came just three months after the June meeting. Since ending its negative interest rate policy in March 2024, the BOJ had generally raised rates about once every six months, making this a shortened interval. The sixth rate increase since Ueda took office, the move marks the shortest gap between hikes since 1990, according to analysts. Behind the faster pace of tightening lies concern over prices. Renewed hostilities between the United States and Iran have pushed international oil prices higher, while expanding global AI demand and the sharp weakening of the yen in currency markets are also lifting import prices, analysts said.
The simultaneous tightening by major central banks worldwide is cited as another key reason. The European Central Bank raised rates on the 10th, and the U.S. Federal Reserve shifted to a tightening stance on the 16th for the first time in three years. Without matching that pace, Japan could see the yen's decline accelerate. Bloomberg noted that the hike "created the first instance ever in which Japan, the Fed and the ECB all raised rates in the same month."
With this increase, Japan's policy rate entered its own estimated neutral rate range of 1.1% to 2.5% for the first time. The neutral rate is the level that neither overheats nor cools the economy.
At a press conference, however, Ueda reaffirmed the policy of continuing to raise rates in order to achieve the 2% inflation target on a sustained basis.
"Until now, the short-term policy focus has been on lifting underlying inflation, which had been below 2%," he said. "Underlying inflation is now approaching 2%." He added: "It is important to stabilize underlying inflation at the 2% level. Our policy phase has changed."
Notably, he did not rule out a so-called "big step" increase of 50 basis points at once. Asked whether he had a particular interval between hikes in mind, Ueda said, "There is no such thing," and on the possibility of a big step, "Depending on the price situation, we cannot rule out any particular approach."
Still, some observers expect the BOJ to avoid aggressive rapid tightening. Two policy board members appointed by Prime Minister Sanae Takaichi voted against the decision, citing concerns about a deteriorating economy. That is up from one dissenting member at the June rate hike. Ueda also said, "As we raise rates, financial conditions are becoming progressively less accommodative," adding that "it is important to avoid raising rates too abruptly, which would tighten financial conditions excessively or cause large swings in asset prices."
In Tokyo currency trading on the day, the yen weakened to the 158-per-dollar range. Bloomberg said, "Ueda delivered both hawkish and dovish signals, but the currency market is not taking his remarks as sufficiently hawkish at this point."
The direction of the yen carry trade is also drawing attention. Global investors have borrowed low-yielding yen to invest in higher-yielding overseas assets such as U.S. Treasuries. Further BOJ rate increases that widen swings in the yen could amplify volatility in global risk assets. Some analysts, however, say large-scale capital flows between the United States and Japan are unlikely, given that the Fed has also turned toward rate increases.
