Bank of Japan to Raise Interest Rate Target to 0.25%; Govt Bond Purchases to be Halved by Early 2026 (UPDATE 1)

The Yomiuri Shimbun

13:29 JST, July 31, 2024

The Bank of Japan decided Wednesday to raise its short-term interest rate target to around 0.25%, from its current range of around 0.0%-0.1%. This is the central bank’s first rate hike since its monetary policy meeting in March, four months ago, when it decided to end its negative interest rate policy. The bank apparently determined that its target of 2% inflation is increasingly certain to be met.

The new policy interest rate will be effective from Thursday. Seven of the nine policy board members, including BOJ Gov. Kazuo Ueda, voted in favor of the rate hike at Wednesday’s monetary policy meeting. Toyoaki Nakamura and Asahi Noguchi voted against it.

There has been a view within the BOJ that “the interest rate can be raised at any time” based on the assumption that prices are likely to continue to rise steadily and sustainably along with wage hikes. Despite concern among some over the slowdown in spending caused by higher prices, the BOJ deemed that the additional rate hike would not have a significant negative impact on the economy, prices or wages in the future.

The quarterly Outlook for Economic Activity and Prices released after the meeting stated that the year-on-year rate of increase in the consumer price index is likely to be around 2.5% for fiscal 2024, around 2.1% for fiscal 2025 and around 1.9% for fiscal 2026.

The purchase of Japanese government bonds — currently set at about ¥6 trillion per month — will be reduced to about ¥3 trillion in January-March 2026, with the amount cut down by about ¥400 billion per quarter in principle.

The BOJ decided in the March meeting to abolish its yield curve control, which keeps long-term interest rates low by purchasing JGBs, but has continued to purchase them at the same level as in March as a countermeasure against sharp fluctuations in interest rates. At its last meeting in June, the bank launched a policy to reduce the amount of its purchases, with its specific plan to be decided at this July meeting.

The bank’s JGB holdings now stand at just under ¥600 trillion, half of the total amount of outstanding bonds. By reducing its purchases, the BOJ will embark on quantitative tightening to reduce its JGB holdings.