Bank of Japan hikes interest rate by 25 bps to 0.50% as expected

The Bank of Japan (BoJ) announced on Friday that it hiked the short-term rate target by 25 basis points (bps) from 0.15%- 0.25% to 0.40%- 0.50% after concluding its two-day monetary policy review meeting.

The decision aligned with the market expectations.

The Japanese central bank raised the rate to its highest level since 2008 after having held steady for three consecutive meetings.

Summary of the BoJ policy statement

BoJ makes rate decision by 8-1 vote.

BoJ board member Nakamura dissented to decision on rate hike.

BoJ’s Nakamura dissented to rate hike decision, saying BoJ should decide on changing guideline for money market operations after confirming rise in firm's earnings power from sources at next MPM.

Chance of Japan's economy moving in line with forecast heightening.

 Japan's economy recovering moderately albeit with some weaknesses.

Many firms saying they will offer solid pay hikes in this spring's wage talks.

Underlying inflation gradually heightening towards the BoJ’s target.

BoJ’s quarterly Outlook Report

Uncertainty surrounding Japan's economy, prices remain high.

Underlying consumer inflation likely to be at level generally consistent with 2% target in second half of projection period from fiscal 2024 through 2026.

FX developments are more likely to affect prices with firms behavior shifting more toward raising wages and prices recently.

Risks to economic outlook are generally balanced

Risks to inflation outlook skewed to upside for FY2024 and FY2025.

Consumption rising moderately as a trend.

Japan's potential growth rate estimated around 0.5%.

Inflation overshooting expectations somewhat due to rising import prices from weak Yen, rising rice cost.

Medium-, long-term inflation expectations heightening moderately.

Nominal wages clearly rising, Japan seeing more firms pass on higher labour, distribution costs.

Underlying consumer inflation likely to increase gradually.

Projected year-on-year rates of increase in the CPI for fiscal 2024, 2025 are higher, reflecting higher rice and import prices.

The BOJ board’s median forecast for core CPI in fiscal 2024 is +2.7%, up from +2.5% in October.

The BOJ board’s median forecast for core CPI in fiscal 2025 is +2.4%, up from +1.9% in October.

The BOJ board’s median forecast for core CPI in fiscal 2026 is +2.0%, up from +1.9% in October.

The BOJ board’s median forecast for real GDP in fiscal 2024 is +0.5%, compared to +0.6% in October.

The BOJ board’s median forecast for real GDP in fiscal 2025 remains at +1.1%, unchanged from October.

The BOJ board’s median forecast for real GDP in fiscal 2026 remains at +1.0%, unchanged from October.

Market reaction to the BoJ policy announcements

USD/JPY jumped to test 156.50 in an immediate reaction to the Bank of Japan's (BoJ) rate hike before quickly retreating to 156.25. The pair is currnetly trading 0.30%  lower on the day at 155.56.

This section below was published on January 23 at 23:00 GMT as a preview of the Bank of Japan Interest Rate Decision.

• The Bank of Japan is set to hike interest rates to 0.50% on Friday.
• All eyes will remain on the language in the policy statement and Governor Ueda’s press conference.
• The Japanese Yen could witness intense volatility on the BoJ policy announcements.

The Bank of Japan (BoJ) is widely expected to raise the short-term interest rate from 0.25% to a 17-year high of 0.50% in January, following the conclusion of its two-day monetary policy review on Friday.

The Japanese Yen (JPY) is set to rock on the BoJ policy announcements as investors seek to find fresh clues on the central bank’s next policy move.  

What to expect from the BoJ interest rate decision?

The BoJ will likely begin 2025 with some action as it remains on track to revive its rate-hiking cycle after pausing for three consecutive meetings. In July 2024, the Japanese central bank unexpectedly raised rates by 15 basis points (bps) from 0.1% to 0.25%.

Markets speculated that a slew of hotter-than-expected inflation readings, the ongoing depreciation of the JPY and a fiscal budget strengthened the case for a BoJ rate hike at the January meeting.  

Tokyo annual Consumer Price Index (CPI) rose 3% in November, up from 2.6% in October. Core inflation, which excludes food and energy costs, increased by 2.4% in the same period after reporting a 2.2% growth in October. Tokyo’s inflation numbers are widely considered a leading indicator of nationwide trends.

Meanwhile, Japan's annual Producer Price Index (PPI) remained at 3.8% in December, driven primarily by high food prices, particularly a 31.8% increase in agricultural goods costs. Separately, the Japanese Cabinet approved a historic budget of $732 billion for the fiscal year beginning in April while restricting new bond issuance to its lowest level in 17 years, per Reuters. 

The recent hawkish commentary from BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino also pointed to a likely rate hike this week. Ueda said on January 16 that the board members “will debate at next week's meeting whether to hike rates.” In his speech on January 14, Himino noted: “Japan's inflation expectations have gradually heightened, now around 1.5%. Japan's economy is roughly moving in line with our scenario projecting underlying inflation, inflation expectations to both move around 2%.”

With a rate hike almost a given, the language of the policy statement and Governor Ueda’s post-policy meeting press conference, due at 06:30 GMT, will help determine the path of the Bank’s next policy move.

The BoJ is also set to publish its quarterly Outlook Report and is expected to raise its inflation projections amid the gradual depreciation of the Japanese Yen and a recent surge in the cost of rice, Bloomberg reported, citing people familiar with the matter.  

Analysts at BBH said: “Two-day Bank of Japan meeting ends Friday with an expected 25 bp hike to 0.5%. Markets have firmed up the odds of a hike over the past week to around 85% after BOJ officials expressed more confidence on wage growth gathering momentum.”

“In our view, the bar for a hawkish surprise is high because the BoJ will want to avoid unsettling the markets as it did back in July. As such, the Yen is likely to remain under downside pressure as the markets continue to price in the policy rate to peak around 1% over the next two years, the analysts added. “

How could the Bank of Japan's interest rate decision affect USD/JPY?

Reuters reported last week, citing sources familiar with the central bank's thinking, the BoJ is expected to maintain its hawkish stance while raising rates. The hawkish hike could be influenced by global financial market developments, such as United States (US) President Donald Trump’s return to the White House.

If the BoJ struggles to provide consistent guidance on the next policy move, reiterating that it will remain data-dependent and make a decision on a meeting-by-meeting basis, the Japanese Yen is likely to resume its downslide against the US Dollar (USD).

USD/JPY could fall hard if the BoJ hints at a March rate hike while expressing increased concerns over inflation.

Any knee-jerk reaction to the BoJ policy announcements could be temporary heading into Governor Ueda’s presser. Investors will continue to pay close attention to US President Donald Trump’s tariff talks, which trigger a big market reaction.

From a technical perspective, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes: “USD/JPY remains confined between the 21-day Simple Moving Average (SMA) and the 50-day variant in the run-up to the BoJ showdown. However, the 14-day Relative Strength Index (RSI) sits just above 50, suggesting that the pair could break the consolidative phase to the upside.”

“A hawkish BoJ hike could revive the USD/JPY correction from six-month highs of 158.88, smashing the pair toward the 200-day SMA at 152.85. The next support is seen at the 100-day SMA of 151.59. Further declines could challenge the 151.00 round level. Alternatively, buyers must yield a sustained break above the 21-day SMA at 157.13 to resume the uptrend toward the multi-month highs of 158.88. Buyers will then target the 160.00 psychological level,” Dhwani adds.