The Japanese yen strengthened, and government bond yields rose sharply after the Bank of Japan (BOJ) implemented an interest rate hike and announced a reduction in its bond purchases. The yen advanced by 0.4% to 152.12 against the U.S. dollar, reflecting market expectations leading up to the decision and heightened by Governor Kazuo Ueda’s remarks during his post-announcement press conference.
The BOJ’s initial pace of bond purchase reductions was slightly slower than some market predictions but appears more aggressive than many anticipated, with a plan to cut purchases by half over a two-year span. The yield on 10-year benchmark bonds increased by 5.5 basis points to 1.05%, while the yield on two-year notes reached its highest level in 15 years.
The Topix stock index surged by 1.5%, driven by gains in banking stocks.
Charu Chanana, Head of Currency Strategy at Saxo Capital Markets, described the BOJ’s actions as among its most hawkish moves given the historically low benchmark. “However, if the Federal Reserve does not signal a rate cut for September later today, the yen might continue to face pressure,” Chanana noted.
In its statement on Wednesday, the BOJ raised its policy rate to approximately 0.25% from the previous range of 0 to 0.1% and announced a reduction in its monthly bond-buying pace, signaling a stronger commitment to policy normalization.
According to a Bloomberg survey, only about 30% of central bank analysts had anticipated a rate hike this week, though over 90% acknowledged the risk of such a move. Market speculation about a rate increase intensified on Wednesday following media reports that board members were considering raising rates to around 0.25%.
Additionally, remarks from Japan’s new currency chief, who indicated that recent yen depreciation had negatively impacted the Japanese economy, contributed to the anticipation of a rate hike.
