The Bank of Japan maintained its interest rates at 1% on Friday, following an 8-1 vote at its two-day meeting that concluded on Friday. According to The Economic Times, Board member Hajime Takata dissented, instead calling for a 1.25% hike. Governor Kazuo Ueda will hold a news conference at 3:30 p.m. (0630 GMT) to explain the policy decision. The central bank stressed its readiness to continue pushing up borrowing costs to forestall mounting inflation risks, maintaining the level reached in June, which was the highest in 31 years. The policy decision came a day after Japanese authorities intervened in currency markets by buying yen and selling dollars to arrest the currency's slide from four-decade lows, a move that underscored concerns over the impact of a weak yen on import costs and inflation.
In its quarterly outlook report, the BOJ upgraded its economic growth forecast for fiscal 2026, reflecting easing concerns over the impact of the Middle East conflict on Japan's economy. However, the central bank lowered its near-term inflation projections, citing the effects of government subsidies and lower oil prices compared with earlier assumptions. Despite the downward revision to inflation forecasts, the BOJ maintained that risks to prices remain skewed to the upside. The central bank also indicated that underlying inflation could exceed its 2% target, reinforcing expectations that further policy tightening remains on the table if price pressures strengthen. The Outlook Report contained sparse changes to forecasts, with growth very slightly revised up for FY26 and FY27, while CPI changes were minimal. The BOJ expects that after government measures to suppress energy prices end in September, CPI will head up towards 2.0% early next year and largely stay there. Most economists surveyed by Reuters expect another rate hike to 1.25% before the end of the year.
There were no surprises at today's BoJ meeting, where the policy rate was left unchanged at 1.00%. As per Investing.com, the market's default position remains a very gradual tightening cycle, with the next hike potentially in October. The Outlook Report continues to point to balanced risks to growth, but upside risks to prices given wages, energy, the AI boom and the weak yen. The BOJ's formal position is that it will continue to tighten policy – probably towards a neutral rate at 2.00%. However, with the government transitioning the economy to growth and wanting supportive conditions, the BoJ may take two years to take the policy rate to 2.00%. That's what is currently priced by the markets. Those in the FX or bond markets looking for BoJ support for the yen or the long end of the JGB market will be disappointed, as there seems little urgency for the BoJ to accelerate its tightening cycle.
The Japanese yen faced renewed pressure on Friday after soaring in the previous session as Tokyo intervened in currency markets before the Bank of Japan's policy decision. According to Reuters, Japan conducted yen-buying, dollar-selling market intervention overnight, pulling the sagging currency from four-decade lows. The dollar gained as much as 0.45% to 160.175 in early trades, after diving 2.4% in its biggest single-day drop since January 2023 in the previous session. However, the intervention effect began to fade quickly, with USD/JPY climbing back to 160.175 in early Friday trading after tumbling from above 163 to below 158 on Thursday. The weak yen has become a growing concern for Japanese policymakers, as it raises the cost of imports and adds to inflationary pressures on households and businesses. Analysts believe the BOJ will need to balance its gradual approach to policy normalisation against the risk of further currency depreciation. With the Japanese real policy rate deeply negative and only being adjusted gradually, it is hard to see BoJ policy having any meaningful impact on the USD/JPY trend.
The intervention strategy appears to be working as intended, with analysts noting favorable timing for currency intervention. As Rodrigo Catril, senior FX strategist at National Australia Bank, told Reuters, "If you want to kind of intervene... it's probably quite a good time," citing a weaker dollar amid pressure at the front end of the U.S. rates market and positive risk sentiment. The euro stood at $1.1523, down 0.04% so far in Asia, after climbing to a six-week high in the previous session, while sterling traded flat at $1.34605. The Aussie and Kiwi dollar were roughly down 0.1%, last at $0.70245 and $0.5875, respectively. Recent economic data suggests the Japanese economy remains resilient, with factory output rising in June and manufacturers projecting further gains in the coming months. Separate data also showed core consumer inflation in Tokyo accelerated to 1.7% in July, indicating that price pressures remain broad-based despite lower energy costs.
