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, or in 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, meaning it has now shortened the interval. The move, the sixth rate increase since Ueda took office, marks the shortest gap between hikes since 1990, analysts said. Behind the faster pace of tightening is concern over prices. Renewed hostilities between the United States and Iran have pushed international oil prices higher, while expanding global AI demand and the yen's steep depreciation in currency markets are also lifting import prices, analysts said.
Another major factor is that major central banks around the world are tightening in unison. 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. Should Japan fail to keep pace, the yen's decline could 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 the increase, Japan's policy rate entered the BOJ's 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 in a stable manner.
"Until now, the short-term policy focus has been on lifting underlying inflation, which had been running below 2%," he said. "Underlying inflation is now approaching 2%." He added: "What matters is stabilizing underlying inflation at the 2% level. Our policy phase has changed."
He notably left open the possibility of a so-called "big step" — a 50-basis-point increase at once. Asked whether he had a particular interval between hikes in mind, Ueda said, "There is no such thing," and on a big step, he said, "Depending on the price situation, we cannot rule out any particular approach."
Still, some observers expect the BOJ to refrain from aggressive, rapid tightening. Two policy board members appointed by Prime Minister Sanae Takaichi voted against the move on Wednesday, citing concerns about a deteriorating economy. That is up from one dissenting member at the June hike. Ueda also said that "as we raise rates, financial conditions are becoming progressively less accommodative," adding that "it is important to avoid raising rates too abruptly, which could tighten financial conditions excessively or cause large swings in asset prices."
In Tokyo foreign exchange trading on Wednesday, the yen weakened to the 157-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 outlook for 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. Treasurys. But if further BOJ rate increases widen swings in the yen, that could amplify volatility in global risk assets. Some analysts note, however, that large-scale capital flows between the United States and Japan are unlikely given that the Fed has also shifted toward raising rates.
