Bank of Japan hikes its short term rate by 25bp to 0.75%, as expected

BOJ's Rate Hike and Its Impact

The Bank of Japan (BOJ) raised its short-term policy rate by 25 basis points to 0.75%, marking the highest level in roughly three decades and indicating a gradual shift from ultra-loose monetary policy. This move was fully anticipated by the markets, driven by strong inflation data and confident signals from policymakers. The immediate market reaction was muted, with attention shifting from the rate hike itself to the BOJ's forward guidance and Governor Kazuo Ueda's remarks. The BOJ acknowledged that inflation has remained above its 2% target due to both imported cost pressures and firmer domestic prices. Real interest rates remain negative, reinforcing the perception that monetary conditions are still accommodative post-hike. Governor Ueda is expected to maintain a cautious tone during his press conference, emphasizing the sustainability of inflation and the importance of wage growth, household consumption, and corporate investment. There are ongoing discussions in the markets regarding the timing of the next hike, with some projecting as early as mid-2026, while others suggest that uncertainties around global growth make further tightening less likely. Overall, the decision emphasizes that policy normalization is underway, but will proceed gradually and cautiously, without a predetermined path.