Japan's central bank has announced a significant increase in its benchmark interest rate, raising it to approximately 0.25% from the previous range of 0% to 0.1%. Additionally, the Bank of Japan (BoJ) has outlined a roadmap for reducing its bond buying program.
Despite this increase, the BoJ expects real interest rates to remain "significantly negative," emphasizing that "accommodative financial conditions will continue to firmly support economic activity."
The central bank projects that the core inflation rate, excluding fresh food prices, will reach 2.5% by the end of the 2024 fiscal year and hover around 2% for the 2025 and 2026 fiscal years.
Yen Strengthens Ahead of Bank of Japan Decision
The yen continued to strengthen against the dollar on Wednesday, in anticipation of the Bank of Japan's much-awaited announcement. Market speculation is high regarding a potential interest rate hike, while equities mostly rose amid growing hopes for a reduction in US borrowing costs.
With two major economic events approaching, traders are positioning themselves strategically as Tokyo keeps its plans under wraps. Comments from Japan's new top foreign exchange official hinted at a possible rate increase.
Interest Rate Hike Bets Surge
Bets on a second interest rate increase since March, which marked the first hike in 17 years, have surged recently. This pushed the yen to 152.12 per dollar, setting it on course for its best month in a year and a half. This comes just weeks after the yen hit a nearly four-decade low close to 162 at the start of July. Higher rates increase government yields, making assets more attractive to investors seeking better returns.
After more than a decade of ultra-loose monetary policy aimed at reviving a sluggish economy and stagnant inflation, the BoJ has shifted its focus this year as prices rise faster than the bank's targets. However, officials must navigate carefully as the economy remains fragile.
Many experts had predicted the bank would maintain its stance this month, but Japan's newly appointed top foreign exchange official, Atsushi Mimura, indicated that the disadvantages of a weaker yen now outweigh the advantages. "While the recent depreciation of the yen has both advantages and disadvantages, the demerits are becoming more noticeable," Mimura told Bloomberg in an interview on Monday, highlighting higher energy and food prices as well as the impact on importers.
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