The Bank of Japan (BoJ) has raised its benchmark overnight call rate by 25 basis points to 1.00%, marking the highest interest rate level since 1995 as policymakers move to contain rising inflation risks.
The widely expected rate increase follows three consecutive meetings where the central bank kept policy unchanged. The latest move reflects growing concerns that underlying inflation may remain above the BoJ’s 2% target.
The decision was passed by a 7-1 vote, with board member Toichiro Asada dissenting and favouring no change, citing risks to production and employment from tighter monetary conditions.
The meeting was notable as BoJ Governor Kazuo Ueda was absent from the vote after being hospitalised since 10 June for treatment of an infected liver cyst.
It marked the first absence of a BoJ governor from a monetary policy decision under the current framework introduced in 1998.
Deputy Governor Ryozo Himino chaired the meeting in Ueda’s place, while Deputy Governor Shinichi Uchida conducted the post-meeting press conference.
The central bank reiterated that further policy normalisation remains appropriate as inflation moves closer to its 2% target and financial conditions remain accommodative.
The BoJ also announced adjustments to its long-term government bond purchase programme, with monthly Japanese Government Bond (JGB) purchases to be reduced by around JPY200 billion per quarter until January-March 2027.
After that period, purchases will be maintained at approximately JPY2 trillion per month.
Board member Naoki Tamura dissented, arguing that long-term interest rates should be determined more fully by market forces.
The BoJ will also continue gradually reducing its holdings of exchange-traded funds (ETFs) and real estate investment trusts (REITs), while retaining the flexibility to pause sales if market conditions deteriorate.
The central bank said Japan’s economy continues to recover moderately despite elevated energy prices and geopolitical uncertainty.
It noted that downside risks to growth have eased since April, supported by government energy subsidies, resilient corporate earnings, a strong labour market and improving supply chains.
However, inflation risks have increased.
The BoJ highlighted broader cost pass-through effects, rising inflation expectations and increasingly entrenched wage-price dynamics as factors that could push core inflation above its target.
Kenanga Research said the June rate hike suggests BoJ policymakers have become more concerned that underlying inflation could remain elevated for longer.
The research house noted that worries over economic growth have moderated since April, while stronger wage growth, broader price pressures and exchange rate effects have strengthened the case for further monetary policy normalisation.
Kenanga expects December to be the most likely timing for another 25 basis point rate increase.
On the currency outlook, the rate hike is expected to provide some support for the yen, although markets had largely priced in the move.
Further yen appreciation would likely require additional BoJ tightening and a narrower interest rate gap between Japan and the United States.
Kenanga expects the USD/JPY pair to remain range-bound in the near term and maintains its end-2026 forecast at 150.0, compared with 156.7 in 2025.
The research house added that uncertainty over energy prices and the pace of US Federal Reserve rate cuts could limit yen gains, with the exchange rate likely to face resistance above the 160 level.
