The Bank of Japan (BOJ) took markets by surprise when they announced their decision to hike rates by 0.15% from <0.10% to <0.25% while policymakers agreed to taper bond purchases to 3 trillion JPY by Q1 2026.
In effect, this would bring quarterly bond purchases down to around 400 billion JPY, with their pace of tapering subject to a midyear review by June next year.
In their official statement, BOJ policymakers noted that the Japanese economy had been recovering moderately and that underlying inflation is expected to ease gradually. Still, they pointed out that there are some weak spots, as higher prices continue to weigh on consumption.
Link to official BOJ July Monetary Policy Statement
The quarterly BOJ Outlook Report shed more light on the central bank’s assessment of growth and inflation trends, as forecasts for real GDP and CPI were revised slightly lower while estimates for the “core-core” inflation for 2025 and 2026 remained mostly unchanged.
Link to BOJ Quarterly Outlook Report
Two policymakers, Nakamura Toyoaki and Noguchi Asahi, dissented the decision to lower borrowing costs, with the latter citing that “it was necessary to more carefully assess how the economic situation had improved with wage hikes becoming widespread.”
During the press conference, Governor Ueda noted that some policymakers expressed concerns about the economic outlook but also assured that rising wages could continue to support private consumption despite higher price pressures.
Japanese yen vs. Major Currencies: 5-min
Overlay of JPY vs. Major Currencies Chart by TradingView
Yen pairs had mostly been in consolidation a few hours prior to the actual BOJ statement, before a sharp tumble ensued juuust before the event. There has been talk of an overnight leak of the BOJ decision to the press, which probably accounts for the whipsaw price action ahead of the announcement.
Still, the Japanese currency pulled higher across the board after the rate hike decision, even recovering back above its pre-BOJ levels against most of its forex counterparts right before the press conference.
Governor Ueda’s relatively somber remarks suggesting that the BOJ could sit tight in the near-term forced the yen to retreat once more, most notably against the Swiss franc and Canadian dollar.