Japan Raises Interest Rate for First Time in 31 Years, But Yen Weakness Expected to Persist [Weekend Money]

October Rate Hike Likely to Be Skipped
Gradual Additional Increase Expected in December
Dollar/Yen to Fluctuate in the Mid-to-High 150 Range

The Bank of Japan (BOJ) has raised its benchmark interest rate to the highest level in 31 years. However, as the central bank signaled that the additional tightening would proceed more gradually than expected, analysts forecast that the Japanese yen’s weakness is likely to persist.

An employee is organizing Japanese yen and US dollars at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Yonhap News Agency

According to Kiwoom Securities, the BOJ increased its policy rate by 25 basis points (1bp=0.01%p), from the previous 1.00% to 1.25%, at its September monetary policy meeting. This is the first rate hike in three months since June, and the policy rate has now reached its highest point in 31 years.

This hike was a preemptive measure to control the upward inflation risk posed by recently rising international oil prices and the weakening yen, especially as the underlying inflation rate approaches the 2% target. The remarks of BOJ Governor Kazuo Ueda also focused on the need to suppress inflationary pressures.

However, financial markets assessed the BOJ’s decision as dovish (favoring monetary easing) for its signal on the future pace of tightening, rather than the rate hike itself. This is because the rate increase had already been priced in by the market, and the board’s vote revealed a 7-to-2 split, with two members dissenting. Governor Ueda also refrained from providing any clear guidance regarding the timing or speed of future hikes.

The report analyzed that while the direction toward further rate hikes by the BOJ will likely be maintained, the pace will inevitably slow. As the latest meeting did not signal consecutive rate increases, it is expected that the BOJ will wait for further data and skip a hike in October, with a potential additional increase coming at the December meeting.

Yumi Kim, a researcher at Kiwoom Securities, said, "As underlying inflation approaches 2% and upside risks to inflation remain, such as rising oil prices, there is still a possibility for further hikes." She added, "However, the BOJ will continue its gradual normalization of policy, watching inflation, wages, and the yen closely."

Kim further noted, "A gradual approach to rate hikes by the BOJ has weakened expectations for a rapid narrowing of the interest rate differential between the U.S. and Japan, which is likely to be a factor weighing on the yen. On the other hand, the deeper the yen weakens, the greater the caution from Japanese authorities regarding intervention in the foreign exchange market, which could limit further depreciation." She concluded, "These two factors are likely to counteract each other through the end of the year, so the dollar/yen exchange rate will likely fluctuate around the mid-to-high 150 yen range."

This content was produced with the assistance of AI translation services.