Bank of Japan Raises Interest Rates and Unveils Bond Purchase Reduction Plan in Policy Shift

In a significant shift towards monetary policy normalization, the Bank of Japan (BoJ) raised its key interest rate to 0.25% from a range of 0-0.1% on July 31, 2024. This marks the second rate hike in 17 years and the highest level since 2008. The decision, made by a 7-2 vote, defied some market expectations and signals a step away from the central bank’s ultra-loose monetary policies.Accompanying this rate hike, the BoJ unveiled a detailed plan to gradually reduce its massive bond-buying program. Monthly purchases of Japanese government bonds (JGB) will be reduced to approximately 3 trillion yen ($19.6 billion) by January-March 2026, down from the current level of around 6 trillion yen. This reduction will occur in stages, with purchases decreasing by about 400 billion yen per quarter.The BoJ’s decision comes as Japan grapples with economic challenges. The bank lowered its GDP growth forecast for the fiscal year 2024 to 0.6% from 0.8%, reflecting ongoing struggles. However, the BoJ maintained its projection that inflation would stay around 2% through fiscal 2026. BoJ Governor Kazuo Ueda stated, ‘It is appropriate to adjust the degree of monetary policy in the perspective of achieving a durable and stable 2% inflation rate’.Market reactions to the BoJ’s decision have been mixed. The yen initially surged against the dollar before retreating. Some analysts view the move as hawkish, with Charu Chanana, Head of Currency Strategy at Saxo, Singapore, stating, ‘This must be one of BoJ’s most hawkish moves given how low it has set the standard to be’. Others, like Marcel Thieliant of Capital Economics, suggest the BoJ could raise rates again as soon as October.The BoJ’s decision contrasts with the expected policies of other major central banks, particularly the U.S. Federal Reserve, which is widely anticipated to pause its rate hikes. This divergence in monetary policy directions could have significant implications for global financial markets in the coming months.

Key points

• The Bank of Japan raised its key interest rate to 0.

25%, the highest since 2008.

• The BoJ plans to reduce monthly bond purchases to 3 trillion yen by January-March 2026.
• Japan’s GDP growth forecast for fiscal year 2024 was lowered to 0.

6% from 0.

8%.

• The BoJ expects inflation to remain around 2% through fiscal 2026.

Contradictions👾Some analysts view the BoJ’s move as hawkish, while others suggest it’s still relatively dovish given the extended timeline for ending quantitative easing.