Source: Sharecast
As expected, the central bank lifted its benchmark interest rate by 25 basis points to 1.25%, its highest since 1995, and suggested that more hikes were on the way.
The move responded to persistent inflationary pressures from the war in the Middle East, strong domestic economic growth, and increasing pressure from Washington to normalise monetary policy after years of an ultra-low policy stance.
"As for the future conduct of monetary policy, given that underlying CPI inflation has been approaching 2% and financial conditions have been accommodative, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions," the BoJ said in a statement.
Stocks in Tokyo surged following the decision as the yen weakened – a weaker yen helps Japanese exporters' bottom lines – with the dollar rising to JPY156.90 from JPY156.14.
Despite the widely expected decision, "the knee-jerk reaction was a swift rise in USDJPY, as two officials dissented", according to Swissquote senior analyst Ipek Ozkardeskaya.
"The market’s answer was clear: one hike is not enough; more is needed to bring the BoJ rate somewhere around neutral. So what BoJ Governor Ueda says matters more than the rate hike itself. How Ueda sees inflation risks evolving and how he sees fiscal concerns fitting into this context will be important for the USDJPY’s next direction."
Ozkardeskaya said rates may need to increase closer to the 1.5-2% range to be considered "neutral": "That means at least one and up to three additional 25bp rate hikes to reach the 1.5–2% range in the coming quarters. If traders believe that the BoJ can’t deliver that, it will be hard to keep the USDJPY from bouncing back towards, and potentially above, the 160 level."