Bank of Japan raises rates to 1%, and will end tapering next year
The Bank of Japan's recent decision to raise its benchmark rate by 25 basis points to 1%, while committing to halt tapering by April 2027, underscores a significant shift in its monetary policy amidst rising inflation concerns. Per the full note from ING, the 7-1 vote reflects a consensus within the central bank about inflationary pressures, despite dissent regarding downside risks to the economy. The immediate market reaction was mild, but a sustained hawkish tone from Deputy Governor Uchida indicates further tightening could be anticipated, contingent on global geopolitical developments, particularly regarding the Middle East.
What the desk is arguing
The desk interprets the BoJ's rate hike as a signal of shifting priorities towards controlling inflation risks in the wake of increased global tensions. Per the full note, the possibility of future rate hikes will depend on developments in the Middle East, which introduces an element of uncertainty in the timeframe for subsequent increases.
With the policy rate now at 1%, the BoJ highlighted a proactive approach, as inflation risks have surpassed previous projections, shifting the narrative from accommodative policies. Notably, the potential for a further hike in December depends on geopolitical stability, which adds volatility to the outlook.
Where it sits in our coverage
Our current consensus forecasts for USD/JPY show a range with a median target of 155.0000 for March 2026 across several firms including hsbc (152.0000) and deutschebank (153.0000).
This alignment suggests that our desk's position is broadly in sync with market expectations, albeit leaning towards the upper end of the consensus range as many firms like stanchart project targets significantly higher than the current rate.
How other firms see it
The group of firms aligned with a bullish sentiment on JPY, including bofa and mufg, see strong fundamentals supporting the BoJ's decision, while rabobank and cibc express more caution regarding the sustainability of this rate increase in light of potential economic headwinds.
Expectations around USD/JPY and broader Asian FX dynamics are likely to be shaped by these sentiments, particularly the implications of the BoJ's actions on regional currency stability and the Fed's own policy trajectory.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoJ's rate hike to 1% reflects increased inflation concerns; next hike depends on Middle East developments.
- 02Vote 7-1 indicates a hawkish shift, with one dissenting member highlighting growth risks.
- 03Consensus target for USD/JPY shows median at 155.0000, indicating market expectations of continued strength in JPY.
Market implications
Traders should closely monitor the USD/JPY pair as it approaches key resistance levels given the recent BoJ decision. Any news or development regarding geopolitical stability, specifically in the Middle East, could lead to volatility in JPY trading.
Risks to this view
A significant geopolitical escalation or negative economic data from Japan could unravel the BoJ's current commitments, leading to a reversal of their tightening policy. Additionally, any abrupt shift in the Fed's position could also overshadow the BoJ's moves.
Older quick take Quick take 10:06 Rates Japan Bank of Japan raises rates to 1%, and will end tapering next year The Bank of Japan raised its policy rate by 25 bp, with one dissenting vote, while deciding to halt tapering from April 2027. The timing of the next hike should depend heavily on the situation in the Middle East. The possibility of an October hike increases if a long-term peace deal is made soon Source: istock Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Min Joo Kang Senior Economist, South Korea and Japan 1.0% BoJ target rate 7-1 votes As expected BoJ’s decisions were broadly in line with market expectations Today’s Bank of Japan rate hike decision was widely expected.
With a 7-1 vote, the BoJ highlighted the risk of inflation exceeding the 2% target, while downside risks to the economy have waned. Newly appointed Toichiro Asada cast a dissenting vote. This was not a major surprise given his reflationist stance.
He dissented, as he saw that downside risks to production and employment outweighed upside risks to prices. The majority of the board favoured shifting the BOJ's policy focus to inflation risks. From July, another dovish member, Ayano Sato, will join the board.
But this will likely leave the board’s dove-hawk balance broadly unchanged. The debates between the hawks and doves are expected to continue in the coming months, and the pace of rate hikes should be only gradual. We’re keeping our base case for the December hike, as the situation in the Middle East remains fluid.
Source: Bank of Japan, ING estimate October rate hike is possible if a peace deal reaches soon At the press conference, Deputy Governor Uchida struck a somewhat hawkish tone in our view . Still, he didn’t give clear guidance on the timing of the next rate hike or the likely terminal rate of the hiking cycle. He spent ample time emphasising upside inflation risks, though, noting that FX pass-through to inflation has increased meaningfully and that the positive wage-price cycle remains firmly in place.
He also noted that financial conditions remain accommodative despite rate hikes. He cautioned that the neutral rate is difficult to estimate precisely -- and the wide range of estimates makes it hard to use as a practical policy guide. This ambiguity will likely disappoint market participants.
Listening to Uchida's remarks, the timing of the next rate hike will likely depend on how quickly energy supply disruptions are resolved. The focus seems to be on the possible impact on growth rather than on inflation. If geopolitical risks subside and downside risks to growth ease further, we expect a majority of board members to support another hike.
The BoJ is likely to focus less on headline inflation and more on its new price measure. It features core inflation, while stripping out distortions from government measures. As such, it should better capture underlying inflation.
The BoJ's preferred inflation measure should stay well above 2% amid firm wage growth, second-round effects from oil price hikes, and a weak JPY. End of tapering likely to improve market stability The BoJ decided to halt tapering from April 2027, keeping monthly Japanese government bond (JGB) purchases steady at around JPY 2tn thereafter. It projects its JGB holdings will fall by roughly 40% by March 2027 compared with June 2024.
When the BoJ began tapering back in 2024, it argued that yield-curve control (YCC) and quantitative easing had significantly impaired JGB markets. It held that a gradual reduction in purchases would help restore market-based price action. Since then, the BoJ’s influence over rate markets has weakened substantially.
Despite tapering being set to end, its balance sheet should continue to shrink as large redemptions roll off. As market-based pricing has improved, we believe the BoJ now prioritises market stability. This should eventually support further rate hikes in the coming months.
Also, it would be easier for the BOJ to convince Prime Minister Takaichi not to oppose rate hikes if the JGB market shows stability. We expect 10-year JGB yields to rise further toward 3.0% and, early next year, even temporarily touch 3.10%. While the BoJ continues to deliver rate hikes, the yield pickup should be much more moderate than it has been over the past year.
Source: Bank of Japan Japanese inflation Bank of Japan Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Older quick take
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