July 31, 2024
New Delhi, India
The Bank of Japan (BoJ) has raised its benchmark interest rate for the second time in 17 years, moving it from the range of 0%-0.1% to 0.15%-0.25%. This decision, announced after the BoJ’s two-day monetary policy review meeting on Wednesday, took markets by surprise.
Key Decisions:
- Interest Rate Increase: The short-term rate target has been raised by 15 basis points (bps) to 0.15%-0.25%.
- Bond Buying Taper: The BoJ will taper Japanese government bonds (JGB) buying to JPY 3 trillion per month starting the first quarter of 2026.
- Rate Decision Vote: The decision was made with a 7-2 vote, with board members Nakamura and Noguchi dissenting.
Monetary Policy Adjustments:
- Interest Rate on Current Account Balances: The BoJ will apply a 0.25% interest rate to current account balances held by financial institutions.
- New Guideline Effective Date: The new guideline for money market operations will be effective from August 1, 2024.
Economic Outlook:
- Economic and Price Forecasts: Japan’s economy and prices are moving in line with forecasts. The BoJ expects the core inflation rate, excluding fresh food prices, to reach 2.5% by the end of the 2024 fiscal year and around 2% for the 2025 and 2026 fiscal years.
- Consumption and Inflation Expectations: Consumption remains firm despite rising prices, with corporate and household inflation expectations heightening moderately.
Bond Taper Plan:
- Monthly Reduction: The scheduled monthly bond buying will be reduced by around JPY 400 billion each quarter.
- JGB Holdings Reduction: The total JGB holdings, currently at 579 trillion yen, are expected to decrease by about 7% to 8% by the 2026 fiscal year.
- Flexibility in Plan: The BoJ emphasized flexibility, stating it will conduct an interim assessment of the reduction plan at the June 2025 meeting and may modify the plan if necessary for the functioning of the JGB market.
Market Reaction:
- Yen Movement: The announcement caused the yen to surge briefly before weakening to levels above 153 per dollar.
- Accommodative Conditions: Despite the rate hike, the BoJ expects real interest rates to remain significantly negative, maintaining an accommodative monetary environment to support economic activity.
The BoJ’s latest monetary policy decisions mark a significant shift away from its long-standing ultra-loose policies. The increase in the benchmark interest rate and the outlined bond buying taper reflect the central bank’s response to evolving economic conditions and inflation expectations. Investors and market participants will closely monitor the BoJ’s future policy adjustments and their impacts on the Japanese economy.
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