Bank of Japan Surprises Markets with Rate Hike, Bond Buying Reduction Plan

In an unexpected move, the Bank of Japan (BOJ) raised interest rates and announced a detailed plan to reduce its massive bond-buying program, marking a significant step towards phasing out a decade of substantial stimulus. This decision, which defied market expectations, raises the overnight call rate target to 0.25% from 0-0.1%, levels not seen since 2008.

The BOJ’s board, in a 7-2 vote, also approved a quantitative tightening (QT) plan to halve its monthly bond purchases to 3 trillion yen ($19.6 billion) starting January-March 2026. This shift to tighter monetary policy contrasts sharply with other major economies, such as the Federal Reserve, which is likely to cut rates soon.

“Despite sluggish consumer spending, monetary officials sent a decisive signal by raising interest rates and allowing for a more gradual balance sheet reduction,” said Fred Neumann, chief Asia economist at HSBC. The yen saw a brief rally, and Japanese banking stocks led the benchmark Nikkei higher after the announcement, with higher rates expected to improve lending margins and boost investment income for banks.

The BOJ cited broadening wage hikes and rising inflation expectations as key reasons for the rate increase. It emphasized the need to remain vigilant against the risk of inflation overshooting. The central bank maintained its inflation projection of around 2% through fiscal 2026 and suggested further rate hikes if the economy and prices align with its projections.

This move comes as the Fed appears poised to reverse its aggressive tightening cycle. More than three-quarters of economists had expected the BOJ to keep rates steady this month. BOJ Governor Kazuo Ueda is set to hold a news conference to explain the decision. The BOJ’s latest quarterly report highlighted the increasing influence of yen movements on inflation and underscored the central bank’s concerns over rising inflationary pressures.

NNEOMA UDENSI

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