–BOJ Releases Specific Plans to Trim its Monthly JGB Purchases to Y3 Trillion from Y6 Trillion by end of Q1 2026
–BOJ Governor Ueda: Raised Rates Because Economy, Prices Have Been on Track
–Ueda: Weak Yen Impact on Prices ‘Not Necessarily Biggest Reason’ for Rate Hike
By Max Sato
(MaceNews) – The Bank of Japan said Wednesday its nine-member board decided in a 7 to 2 vote to raise the overnight interest rate target to 0.25% from a range of 0% to 0.1%, citing gradually rising inflation expectations among households and businesses and high but slightly easing uncertainties for the economy.
It also warned of upside risks to its GDP and CPI forecasts, specifically pointing out that the impact of currency market fluctuations on domestic prices is greater than in the past now that more firms are reflecting higher costs in prices and raising wages amid widespread labor shortages.
The forex factor is not reflected in the standard scenario by the board and “not necessarily the biggest reason” for the rate hike decision at the July meeting, Governor Kazuo Ueda told a news conference.
The BOJ has been under pressure from some politicians to raise rates to help turn around the protracted depreciation of the yen that has kept import costs high, one of many reasons for sluggish voter support for the Kishida administration that has been rocked by a political donation scandal at the ruling party.
Earlier this month, the dollar hit a fresh 38-year high above ¥161.70 but it has eased to around ¥154 on suspected stealth yen-buying invention on July 11 and 12 by the Ministry of Finance, which appeared to have taken advantage of the U.S. CPI data for June that showed easing inflation. The data prompted some dollar selling on the notion that the Federal Reserve may lower interest rates in September.
Asked repeatedly why the bank had to raise rates now, Ueda said because both growth and prices have been “on track” and there are upside risks. He denied that the bank made the move before uncertainties can arise on the political front. The ruling Liberal Democratic Party will elect its leader in late September when the three-year term of the current party chief, Prime Minister Fumio Kishida, ends. He can run for re-election. Markets are also watching the impact of the U.S. presidential election in early November.
On a possible rate cut by the Fed in September, Ueda said, “It may lead to an appreciation of the yen” if the Fed can lower rates while guiding the U.S. economy to a soft-landing path, which would support growth in Japan.
Since the short-term rate is close to zero, the bank noted that monetary conditions in Japan are expected to remain accommodative for now when adjusted for inflation. “Real interest rates are expected to be significantly negative” after the rate hike and “accommodative financial conditions will continue to firmly support economic activity.”
If growth and inflation evolve around the bank’s medium-term forecasts provided in its quarterly Outlook Report for July released Wednesday, the bank will “continue raising the policy interest rate and adjust the degree of monetary accommodation.” The board left its policy stance steady at the last two meetings after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote in March.
In response to questions, Governor Ueda said BOJ policymakers don’t consider 0.5% a ceiling for the policy rate, which is still far below the zone that can be regarded as neutral to economic activity.
Whether the bank will raise rates again this year, Ueda said will depend on upcoming data including the effects of two rate hikes. The governor said a “gradual” pace of rate hikes at an early stage is better than jacking up interest rates later when upside risks to inflation materialize.
In the Outlook Report, the bank provided an update on the board’s medium-term growth and inflation outlook as well as risk analysis, which showed a slight uptick in consumer inflation in the next fiscal year starting in April 2025, compared to its April projections.
“With regard to the risk balance, risks to economic activity are skewed to the upside for fiscal 2025,” the bank said. “Risks to prices are skewed to the upside for fiscal 2024 and 2025.” In April, the bank said risks to economic activity were generally balanced for fiscal 2024 onward while risks to prices are skewed to the upside for fiscal 2024 but generally balanced thereafter.
The board’s median forecast for GDP growth is 0.6% in the current fiscal year, revised down from 0.8%. The board maintained its projection that the economy will rise 1.0% in the each of the following two years. The year-on-year increase in the core CPI (excluding fresh food) is forecast at 2.5% in fiscal 2024 ending in March 2025, down from 2.8% projected in April. The board’s median forecast for fiscal 2025 was revised up to 2.1% from 1.9% but its forecast for fiscal 2026 is unchanged at 1.9%.
Looking ahead, the bank said “there remain high uncertainties” surrounding Japan’s economy including developments in overseas economic activities and prices, in commodity prices, and in domestic firms’ wage- and price-setting behavior. It is slightly more upbeat than its long-held statement repeated until last month that “there are extremely high uncertainties.
“Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BOJ said, repeating is recent view, but it also said, “In particular, with firms’ behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices.”
Consensus among many BOJ watchers was that the board would wait for more data to confirm whether wage hikes are spreading to smaller firms before raising rates in September.
Ueda said the board went ahead with a rate hike at its July meeting based on some data and surveys. May wages data showed base wages among regular workers rose at a faster pace (2.6% on year vs. 2.3% in April), although real wages continued falling for more than two years.
He also quoted a special volume on the trend of wages at small businesses issued after the BOJ’s main quarterly Sakura Report on regional economies for July, which showed that more firms were generally raising wages and improving working conditions. But he didn’t touch on the point that some firms reported they could not afford to offer any pay raises or could only give higher bonuses.
At first glance, the Tokyo CPI data released last week appeared to be “a little weak,” Ueda said, but added that he could infer a pickup in services prices when special factors were removed.
Consumer inflation in Tokyo, the leading indicator of the national average, picked up only slightly in July in the core reading after the government ended 18-month long utility subsidies in June for July bills, but inflation slowed in two of the three key measures as the upward move in overall energy prices was offset by easing processed food markups and slower gains in hotels and mobile phone communications charges. The prices of services excluding owners’ equivalent rent rose just 0.6% on year in July, contributing 0.20 point to the Tokyo CPI, down from a 1.1% rise (plus 0.38 point) in May, partly due to Tokyo’s free high school education that began in April.
In the July meeting, the board decided in a unanimous vote to start reducing the pace of its purchases of Japanese government bonds (JGBs) gradually to around ¥3 trillion in the January-March quarter of 2026 from about ¥6 trillion now. In principle, it will reduce the pace by roughly ¥400 billion every quarter. At its June meeting, the board voted 8 to 1 to set the stage for gradually reducing the bank’s large holdings of various financial assets and decide on special plans at the July meeting after consulting market participants.
Ueda repeated his comment made last month that the overnight interest rate target remains the key policy tool, not changes to the bank’s asset holdings. The upward pressure on long-term interest rates will be limited as the bank’s outstanding JGB holdings will fall by only 7% to 8% in two years, he said.
Asked how the bank would respond to heightened downside risks, for example, caused by external shocks, Ueda said, “We will first consider whether lowering the short-term interest rate is appropriate, although we don’t know what level it will be at this point.”
“If it’s not enough, we would not rule out the possibility of using unconventional monetary policy tools again,” he said, referring to asset purchases and special loan programs to support bank lending.
The bank will review the process at its June 16-17, 2025 meeting and “may modify the plan as appropriate, if deemed necessary after reviewing the developments in and functioning of the JGB markets.”
The BOJ will continue using asset purchases as a fine-tuning tool. If long-term interest rates rise rapidly, the bank will “make nimble responses, for example, by increasing the amount of JGB purchases and conducting fixed-rate purchase operations of JGBs, both of which can be done regardless of the monthly schedule of JGB purchases.”
The bank is at an early stage of normalizing its policy and the process of whittling down its financial assets is still far from quantitative tightening in other major economies, in which central banks stop reinvesting in government bonds and let their swollen balance sheets shrink in line with economic recovery.
The BOJ officials hope to revive the functions of bond markets that have been paralyzed by years of large-scale monetary easing conducted mostly during the 10-year period to April 2023 under Haruhiko Kuroda, a former senior official at the Ministry of Finance, who believed that flooding the financial system with massive injections of cash should reflate the economy.
BOJ officials are trying to ensure that price increases will accompany sustained wage hikes in coming years, instead of just being pushed up by high costs for materials and goods. That’s why they quote their own estimate for “underlying inflation,” which has been slow to rise due to weak services prices which are closely tied to wage growth. Government officials still warned that the economy has not completely recovered from decades of deflation.
Ueda said, “underlying inflation” has risen from zero and is moving up toward the bank’s 2% price stability target but that “there is still some distance.”
The two members who opposed the March hike also voted against the chairman’s proposal to raise the policy rate to 0.25%, which will also be applied to current account balances held by financial institutions at the BOJ beyond required reserve balances.
Toyoaki Nakamura, a former Hitachi executive, preferred to just indicate the board’s intention to raise rates this time. He argued that the bank should analyze more data including the quarterly business survey by the Ministry of Finance (Q2 data due on Sept. 2) at the next meeting on Sept. 19-20. The Cabinet Office uses the results of the survey to calculate capital investment and private-sector inventories in the revised GDP data for April-June released a week later. Noguchi Asahi, who was an economics professor before joining the board, also called for a more cautious approach in assessing how the economy is improving and whether wage hikes are becoming widespread.