BoJ Recap: Not as hawkish as expected

The Bank of Japan (BoJ) raised its short-term interest-rate target to 1.25% from 1.00% in a 7-2 vote, marking another step in the normalisation of monetary policy and widely matching what everyone has been expecting for weeks. Governor Kazuo Ueda said the policy phase had changed as underlying inflation approached 2% but stressed that the timing and pace of further increases would depend on the outlook and accumulated effects of previous hikes.

The decision was opposed by board members Asada and Sato, who argued that consumer-price inflation remained below 2% and that economic and price developments had not accelerated enough to justify another increase. The majority, however, judged that monetary support needed to be reduced to ensure the inflation target was achieved sustainably and stably.

The BoJ said underlying inflation was approaching 2% and that price pressures were becoming more persistent. Wholesale inflation remains elevated because of oil prices, Yen weakness and AI-related demand, while higher business-to-business costs are spreading to consumer prices. Firms are also continuing to pass higher wages through to selling prices, and inflation expectations are rising.

Ueda described the Japanese economy as recovering moderately, albeit with some weakness, while financial conditions remained accommodative. He said the policy phase had changed and that the BoJ would continue to raise rates and adjust the degree of monetary easing in response to economic activity, prices and financial conditions. However, he ruled out any preset timetable, saying it was difficult to determine the terminal rate and that the end point would only become clear retrospectively.

He also identified several risks to the outlook: the Middle East conflict, oil prices, AI-related demand and FX volatility. He said a second phase of price increases linked to the Middle East crisis was already occurring and that the BoJ needed to act pre-emptively if inflation threatened to overshoot 2%. At the same time, policymakers want to avoid the financial damage caused by excessively rapid tightening, meaning large or consecutive hikes would be used only if the risk of an overshoot became significant.

Ueda also stressed that the BoJ was not conducting monetary policy to control the Yen’s level, although exchange-rate movements remained important because of their impact on prices. He said the spring wage negotiations in FY 2027 would be crucial in determining whether trend inflation stabilised around 2%, and he insisted that the bank would maintain its independence and coordinate appropriately with the government.

To sum up

The event’s tone leant hawkish but measured. The BoJ has clearly entered a new phase of policy normalisation, with underlying inflation, wage pass-through and rising expectations providing a stronger case for further tightening. However, Ueda’s emphasis on the accumulated impact of past hikes, the need to avoid excessive speed and the absence of a fixed timetable suggest that future moves will be gradual and heavily data-dependent.