The Bank of Japan raised its policy rate to 1.25%, the highest level in 31 years. The increase took effect on 24 September, while the yen has continued to weaken amid expectations of further US rate hikes and other factors.
At its monetary policy meeting on 18 September, the Bank of Japan decided by majority vote to raise its policy rate by 0.25 percentage points to 1.25%, with the increase taking effect from 24 September. The rate is now at its highest level since 1995, and the move is expected to affect households through mortgage and deposit rates.
In the market immediately after the decision, the yen continued to weaken, falling from the upper ¥157 range to the ¥159 range per US dollar. The split within the Bank of Japan over the decision and expectations regarding US interest-rate trends were among the factors behind the move, while views spread that the yen remains susceptible to movements in US interest rates.
Mortgage and deposit rates have already begun to move. Mitsubishi UFJ Bank will raise its short-term prime lending rate from 2.375% to 2.625% effective 2 November, and other banks are making similar revisions. Because the reference rates for variable-rate mortgages are linked to the short-term prime lending rate, further revisions by other banks are expected in succession.
The 3 megabanks, Japan Post Bank and au Jibun Bank announced that they would raise ordinary deposit rates to 0.5% from November. Fixed-term deposit rates are moving differently from bank to bank, with the effects of the rate hike expected to be reflected particularly in shorter-term products.
The Bank of Japan's rate hike enters the phase of decisions based on the estimated neutral interest rate range of 1.1%–2.5%. Future rate increases will be assessed cautiously, taking into account not only economic activity and prices but also their impact on financial markets.