Japanese markets moved in an unexpected direction on Friday after the country’s central bank lifted benchmark interest rates to their highest level in 31 years.
Rate hikes typically strengthen a currency, drive bond yields higher and weigh on equities. Yet Japan’s yen, government bond yields and stock market all moved in the opposite direction.
The yen weakened beyond 157 against the dollar, while the yield on the 10-year Japanese Government Bond fell. At the same time, the Nikkei 225 climbed 1.5% after the BOJ raised its policy rate to 1.25%.
The move took the policy rate to its highest point since 1995, only three months after the central bank’s previous increase.
Analysts attributed the unusual market response to the BOJ board’s divided vote, which suggested the central bank may not pursue an especially aggressive tightening path.
“The two dissenting votes in favor of keeping rates unchanged came as a surprise,” said Hirofumi Suzuki, chief FX strategist at Japanese bank Sumitomo Mitsui Banking Corporation.
The decision passed by a 7-2 vote, with board members Toichiro Asada and Ayano Sato opposing the increase.
Asada argued that core inflation below 2% indicated the economy might not yet be strong enough to justify higher rates. Japan’s core inflation rate was 1.7% in August, down from 1.8% in July.
Sato likewise said economic and price developments had not accelerated substantially from their previous pace.
The market reaction was also influenced by the fact that the hike came without an updated outlook report, limiting the BOJ’s ability to strengthen its hawkish message through revised forecasts, according to Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Shigeto Nagai, head of Japan economics at Oxford Economics, shared that assessment. Speaking to CNBC’s “Access Middle East,” Nagai said the dissenting votes suggested Prime Minister Sanae Takaichi had not been persuaded to accept the U.S. request for faster and more frequent rate increases.
Reuters reported Friday that U.S. Treasury Secretary Scott Bessent had pressed for higher BOJ rates during a May meeting with Japanese Finance Minister Satsuki Katayama.
“Secondly, if we look at the statement, all the phrases and the tone was almost similar to what we saw in the quarterly outlook report published in July, so the tone was less hawkish than financial markets had hoped for,” he added.
Higher rates — by how much?
Economists believe another rate increase remains possible, with December viewed as a likely timing.
State Street’s Loo expects BOJ Governor Kazuo Ueda to stress that every upcoming policy meeting remains “live.”
“The debate is no longer whether the BOJ hikes, but how far rates ultimately go,” he said.
The BOJ said it would continue raising rates as economic and price conditions evolved. However, it also warned that growth could slow as elevated oil prices, driven by the conflict in the Middle East, weigh on the economy.
Sam Jochim, an economist at EFG International, said rates could increase approximately once every three months as underlying inflation moves toward 2%. He forecasts a terminal rate—the expected peak—of between 1.75% and 2% in 2027.
The BOJ has not provided a forecast for the terminal rate. Instead, it has reiterated that monetary policy will be conducted “as appropriate” to stabilize underlying inflation at around its 2% target.
Stefan Angrick, head of Asia-Pacific economics at Moody’s Analytics, anticipates another increase around the turn of the year. However, he said weak demand-driven inflation and lackluster real-wage growth would constrain further hikes.
— CNBC’s Lisa Kim contributed to this report
