Japanese markets had a seemingly counterintuitive reaction on Friday after Japan’s central bank raised its benchmark interest rate to the highest level in 31 years.
Rising interest rates typically support a country’s currency, pushing up bond yields and weighing on stock markets. Japan’s currency, bond yields, and stock market moved in exactly the opposite direction.
of circle 10-year bond yield falls above 157 against the dollar Japanese government bonds While I slipped, Nikkei Stock Average The rate rose by 1.5% as the Bank of Japan raised its policy interest rate to 1.25%.
The rate hike brought the policy rate to its highest level since 1995 and came just three months after the previous rate hike.
Experts pointed to the divergent decisions by the Bank of Japan’s board of directors as the reason for the market’s unusual reaction, suggesting that the Bank of Japan may take a less hawkish stance.
“I was surprised that there were two votes in favor of leaving interest rates unchanged,” said Hirofumi Suzuki, chief foreign exchange strategist at Japanese bank Sumitomo Mitsui Banking Corporation.
The decision to raise the price was split 7-2, with board members Toichiro Asada and Ayano Sato voting against the verdict.
Mr. Asada argued for keeping interest rates stable, noting that economic conditions may not necessarily be strong as the core inflation rate is below 2%. Japan’s core inflation rate was 1.7% in August, down from 1.8% in July.
Mr. Sato also said that the current economic and price situation does not appear to be accelerating significantly compared to before.
Masahiko Lu, senior fixed income strategist at State Street Investment Management, said the market reaction also stemmed from the fact that the rate hike was also carried out without the release of an updated outlook report, which limited the Bank of Japan’s ability to reinforce its hawkish message through outlook revisions.
Shigeto Nagai, head of Japan economics at Oxford Economics, echoed his views. Nagai told CNBC’s “Access Middle East” that the two opponents signaled that Prime Minister Sanae Takaichi was not satisfied with acceding to U.S. demands for faster and further rate hikes.
Reuters reported on Friday that U.S. Treasury Secretary Scott Bessent emphasized the need for the Bank of Japan to raise interest rates during a meeting with Finance Minister Satsuki Katayama in May.
“Second, if you look at the statement, all of the language and tone is very similar to what we saw in the quarterly outlook report released in July, and the tone was not as hawkish as financial markets were expecting,” he added.
Higher fees — how much?
Experts believe that another rate hike is being considered, possibly in December.
State Street’s Mr. Lu said he expects Bank of Japan Governor Kazuo Ueda to emphasize that all future meetings will be “live.”
“The debate is no longer whether the Bank of Japan will raise interest rates, but how high interest rates will ultimately rise,” he added.
The Bank of Japan said it would continue to raise interest rates in response to developments in economic and price conditions. However, he acknowledged that growth may slow due to soaring oil prices caused by conflicts in the Middle East.
EFG International economist Sam Jokim said interest rates could rise about once every three months as underlying inflation approaches 2%. He expects the final interest rate in 2027 (the expected peak level) to be between 1.75% and 2%.
The Bank of Japan has not predicted the final interest rate, instead maintaining its position that it will conduct monetary policy “appropriately” to stabilize underlying inflation around its 2% target.
Stefan Anlich, head of Asia-Pacific economics at Moody’s Analytics, said he expected the economy to pick up again around the start of the year, but weak demand-driven inflation and disappointing real wage growth would limit further movement.
