BOJ Raises Rate to 1%; Strategists Say Move Reflects Inflation Concerns

The Bank of Japan raised its benchmark interest rate to 1%, and market strategists said the move underscored the central bank's concern about rising prices.

Bloomberg reported on June 15 that the BOJ lifted its policy rate by 0.25 percentage point to 1% at a monetary policy meeting, the highest level since 1995. The decision was widely expected, with 49 of 51 economists surveyed by Bloomberg forecasting the outcome.

Market participants focused on the BOJ's concern over inflation risks rather than the economy.

Charu Chanana, chief investment strategist at Saxo Markets, said the BOJ is particularly worried that core inflation remains above its 2% target. The rate increase shows the central bank's vigilance over price pressures.

Still, analysts said the hawkish message was limited because the BOJ maintained its stance that financial conditions will remain accommodative. The policy board voted 7-1, and the BOJ offered no specific guidance on the pace of further tightening.

Alex Loo, TD Securities' chief Asia economist, said the BOJ would need to show a faster path for rate hikes than one increase every six months, or signal that the terminal rate could rise above 1.5%, to persuade markets. Delivering a strong hawkish message would also have been difficult with Governor Kazuo Ueda absent from the meeting for hospital treatment, he added.

Attention is now shifting to whether the BOJ will tighten further. With the dollar-yen exchange rate still hovering around 160 yen, continued yen weakness and rising import-price pressures could increase the chances of another rate hike.

Meanwhile, Ryutaro Kimura, chief bond strategist at BNP Paribas Asset Management, said the BOJ's decision not to conduct an additional interim review of its government bond purchase reduction plan, or quantitative tightening, was intended to prevent markets from building excessive expectations that QT could be halted.