Japan’s BoJ rushed a rate hike without waiting for evidence

At Wednesday’s policy meeting, the Bank of Japan (BoJ) raised the policy rate to 0.25% without clear evidence of wage-driven inflation in wage and consumption data. Although CPI has stayed above 2%, the core-core CPI (excluding energy and fresh foods) has been easing.

What you will learn:

• The BoJ argued that recent data confirmed that the economy is on track for achieving the 2% inflation target as projected. The bank stressed that moves to raise wages “have been spreading across regions, industries, and firm sizes.”
• The BoJ revealed its plan for reducing JGB purchases which was in line with our projection. The bank will reduce monthly JGB purchases by ¥0.4trn every quarter from the current ¥6trn to reach ¥3trn in 1Q of 2026. Despite the substantial reduction in purchases, it will only reduce the BoJ’s JGB holdings by 7% and the share in outstanding JGBs to 45% from 48% by the end of FY2025.
• The statement said that “given that real interest rates are at significantly low levels, if the outlook in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate.” Based on this more hawkish policy reaction function, we will revisit our current projection to examine a chance of an earlier rate hike before spring next year.