Bank of Japan hikes to 1.25%, the highest since 1995

The Bank of Japan raised its policy rate by a quarter point on Friday, lifting the uncollateralized overnight call rate to around 1.25% — a level Japan has not carried since 1995 — in a 7-2 vote recorded in the statement released at 11:54 local time (02:54 UTC).

Two board members voted against the increase. The statement records Asada Toichiro dissenting on the grounds that with consumer inflation excluding fresh food “being below 2 percent recently, it could not necessarily be said that the economic situation was strong,” and that it was therefore preferable to leave the guideline unchanged. Sato Ayano dissented because current economic and price developments “did not appear to have substantially accelerated compared to before” and it was not appropriate to raise the policy rate at this meeting.

The vote on the rate was not the only split. Takata Hajime and Tamura Naoki opposed the description of the price outlook, each arguing that inflation, including underlying CPI, had already reached or was consistent with the 2% target.

What the statement said

The Board justified the increase with the risk that underlying CPI inflation “will deviate upward to a level above the price stability target of 2 percent, given factors such as firms’ behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations rising.”

The accompanying assessment described producer prices as persistently high year on year, driven by the expansion in AI-related demand as well as expensive crude oil and a weak yen, with business-to-business price pressure now spilling into consumer prices. It also listed the Middle East situation, AI-related demand and foreign-exchange developments as the risks requiring attention.

The mechanics change on September 24, when the new guideline takes effect. The interest rate applied to the complementary deposit facility becomes 1.25% and the basic loan rate 1.5%. The Bank also voted unanimously to convert the loan rate for its climate-related funds-supplying operation to a floating rate and to cap the amounts on offer.

How markets took it

The move had been widely anticipated. Almost 90% of economists surveyed by CNBC expected the 25 basis point increase, and money markets had fully priced it, which is why the immediate reaction was orderly rather than violent.

The yen weakened 0.45% to 156.64 per dollar after the decision, and the benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947%, according to CNBC. CoinDesk reported that bitcoin rose against the yen and that its dollar price held steady through the release, topping $77,000.

By 09:00 UTC on Friday, bitcoin had extended that move. The BTC-USDT pair on KuCoin traded at $78,301, up 2.14% over 24 hours and within dollars of its session high, having bottomed at $76,034 earlier in the day. Ether changed hands at $2,500.78, up 2.3%, while BNB traded at $753.88 and Solana at $106.06, up 5.8%.

Japan’s rate path matters beyond Tokyo because of the yen-funded carry trade: years of near-zero Japanese rates made the yen the funding currency of choice for leveraged positions in higher-yielding assets, crypto among them, which is why each Bank of Japan meeting is treated as a potential risk-asset event.

The hike lands at the end of a heavy macro week. The Federal Reserve raised its target range a quarter point to 3.75%-4% on Wednesday, and the Senate blocked the Digital Asset Market Clarity Act on Tuesday. On the flow side, the newest session on Farside Investors’ table is September 16, a net $295.9m of redemptions across the US spot bitcoin funds, taking the five sessions from September 10 to September 16 to roughly $882m net out. The September 17 print had not settled on that table at the time of writing.

The next scheduled inputs are the Bank of Japan’s Summary of Opinions on October 1 and its next policy meeting on October 29-30, alongside US PCE inflation on September 30 and the September 25 Deribit options expiry.