BOJ Hike Boosts Yen as Inflation Expectations Rise

The Bank of Japan (BOJ) raised its key policy rate to a nine-year high on Friday, fueling expectations for further hikes and offering support to the yen. This move, as reported by Bloomberg, is viewed as a response to the central bank's more optimistic outlook on inflation.

The BOJ increased the overnight call rate by a quarter-percentage point to 0.5%, a move that was widely anticipated by markets. The decision to wait until January to hike the rate, according to Bloomberg, was likely linked to the need to confirm wage trends and assess the initial market reaction to the new US administration.

In a post-decision press conference, Governor Kazuo Ueda reiterated his existing stance, stating, "We’ll raise rates and adjust policy if our outlook is realized." However, he also emphasized that the BOJ has no specific timing in mind for its next move. Ueda acknowledged that the BOJ is still analyzing the neutral interest rate, hinting that the current cycle may not end at 1%, as some economists predict.

The yen gained as much as 0.8% against the dollar in response to Ueda's remarks, while yields on 10-year Japanese government debt rose 2 basis points to reach 1.225%. Japanese stocks, many of which benefit from a weak yen, ended the day down 0.1%.

"The BOJ rate hike is supportive for the yen and it is likely to further strengthen from here," said Wee Khoon Chong, senior APAC market strategist for BNY in Hong Kong, to Bloomberg. "The relatively hawkish statement points to further rate hikes, which might come as soon as May upon confirmation of wage pressure."

The BOJ's latest outlook report, released alongside the rate decision, shows a significant upward revision in inflation projections. All six projections now stand at 2% or more for the first time since the BOJ began publishing them, bolstering market expectations of a gradual rate hike trajectory.

"What will continue to be important is the trend in exchange rates," said Takeshi Minami, economist at Norinchukin Research Institute, to Bloomberg. "If the yen continues to weaken, politically speaking, the rise in import prices will put pressure on people’s livelihoods, and the BOJ will find it easier to raise interest rates."

The BOJ's rate hike, while demonstrating its outlier status as the only major central bank currently raising rates, nonetheless brings Japan closer to the rate levels of other countries. This increased alignment could potentially enable a more conventional response to future economic events, if necessary.