What a way to round off the year! The Bank of Japan (BoJ) delivered a policy decision that, while expected, marks a significant turning point, effectively ‘bookending’ 2025 with two crucial rate hikes and firmly stepping away from its ultra-easy monetary era.
The BoJ’s Big Move: A Year of Change
As anticipated, the BoJ raised its short-term policy rate by 25 basis points, moving it from 0.5% to 0.75%. This hike, which takes the rate to its highest level in three decades, follows a similar move back in January, cementing 2025 as the year Japan began its cautious but decisive shift away from negative interest rates.
Markets had largely priced in this move, so the initial reaction in the yen was contained. We saw a brief, shallow burst of yen strength immediately after the announcement, before the currency retreated. USD/JPY pushed above 156.10, later pulling back towards 155.85 as liquidity thinned and traders began to digest the nuances of the BoJ’s forward guidance rather than just the hike itself.
Digging Deeper into the Statement
The BoJ’s statement reiterated some familiar but critical points. Policymakers emphasized that despite the hike, real interest rates remain significantly negative, and overall monetary conditions are still accommodative. The rate decision itself was unanimous, a sign of broad consensus, but the statement did reveal some interesting differences in opinion regarding inflation dynamics.
Board member Takata, for instance, took issue with the description of the inflation outlook, arguing that CPI, including underlying measures, has already broadly reached the price stability target. Similarly, board member Tamura objected to the wording on underlying inflation, suggesting it would likely be consistent with the target from the middle of the projection period. While neither formally dissented from the rate hike, these comments highlight the ongoing debate within the central bank about the pace and timing of future adjustments.
Crucially, the Bank reiterated its commitment to continue raising the policy rate if the economy and prices evolve in line with its forecasts, signalling a conditional but clear openness to further tightening down the road.
Market Reactions and Global Snapshot
In the rates market, Japanese Government Bond (JGB) yields remained elevated, with the 10-year yield touching its highest level since May 2006. Major FX pairs outside of the yen remained subdued, largely trading in range-bound conditions as the session concluded.
Asia-Pacific stocks, however, found some cheer from an improved Wall Street performance:
- Japan (Nikkei 225): +1.14%
- Hong Kong (Hang Seng): +0.65%
- Shanghai Composite: +0.5%
- Australia (S&P/ASX 200): +0.5%
Beyond the BoJ, other headlines caught our attention: from the EU sealing a €90bn financing deal for Ukraine to the Trump administration reviewing Nvidia AI chip sales to China, and even a Tesla Cybercab reportedly spotted testing. On the economic front, Australia’s private sector credit growth held steady, UK consumer confidence rose (though remained pessimistic), and Japan’s core CPI holding at 3.0% further reinforced the BoJ’s outlook. Goldman Sachs made calls for the BoE to cut rates in 2026 and commented on the unlikelihood of US CPI moving Fed policy.
All eyes now turn to BoJ Governor Ueda’s press conference, scheduled for 0630 GMT / 0130 US Eastern time, where more insights into the central bank’s future path are expected.
This article was written by Eamonn Sheridan at investinglive.com.
Source: Original Article
