The Bank of Japan (BOJ) has raised short-term policy interest rates from 0-0.1% to 0.25% and will reduce monthly bond buying to ¥3 trillion ($19.6 billion) from the current ¥6 trillion as of Q1 2026.
The decision was taken at a two day meeting on July 30 and July 31, and was voted in favour of by 7-2 by the BOJ’s board. It is a significant move for the global currency market and came after Japan managed to quell the threat of deflation, and comes after its first rate hike earlier this year in March when the bank raised rates for the first time since 2007.
The inflation outlook is expected to remain at around 2% until Japan's fiscal year 2026, and more rate hikes could be on the way.
Krishna Bhimavarapu, Asia Pacific economist at State Street Global Advisors, said in a statement: “Today’s BOJ meeting proved to be the blockbuster event that we have been forecasting. Not only did the bank raise the policy rate and laid-out plans to stealth-taper their [bond] purchases, but also gave markets a true sense of guidance, as they now have significant clarify and confidence in the direction of policy.”
Bhimavarapu added: “We expect the policy rate to reach a terminal of 1% next year and look for improvements in consumption and growth outlook in the economy. Either way, the BOJ has taken the big bold step towards normalisation, and it marks a new dawn in the land of rising sun.”
Meanwhile all eyes are turning to the US Fed to see if it could cut rates in September. On July 31 it decided to hold rates steady at a range of 5.25% to 5.5%, but indicated a cut could come in September in order to help keep unemployment low, even before inflation hits its core target of 2%.
Raisah Rasid, a Singapore-based global market strategist at JP Morgan Asset Management, commented: “The Federal Open Market Committee (FOMC) expectedly held the Federal funds rate unchanged. The statement leaned dovish as there were strong hints that monetary policy easing is on the table at its next meeting in September.”
