[Analysis] BOJ Raises Rates to 1.25%: Another Hike Before Year-End? Will the Yen Weaken No Further? What Governor Ueda Said and the Background

At its monetary policy meeting on 18 September, the Bank of Japan raised its policy rate by 0.25 percentage points and indicated that it would not rule out the possibility of another rate hike before year-end. The yen moved sharply for a time after the announcement, with the exchange rate moving into the mid-¥157 range. There was a split in the votes at the time of the announcement, while the rate hike itself was seen as being within the range priced in by the market.

At Governor Ueda's press conference, the view that the policy environment had changed and the suggestion that a 0.5 percentage-point rate hike could not be ruled out were highlighted. Although he avoided making a clear statement on future rate hikes, he said that the next hike would not occur at a pace of once every 3 months, and the market is closely watching developments before year-end.

Market participants have analyzed the rate hike as reflecting consideration of the economic impact of higher prices caused by factors such as rising crude oil prices and yen depreciation, as well as the effects of policy rates remaining high. A 0.25 percentage-point rate hike by the United States was also reported, and many observers believe that the Japan-US interest rate differential will not narrow, limiting the possibility of a correction in the yen's weakness.

The view was also expressed that corporate demand for funds is increasing, and the assessment remains that financial conditions are accommodative. The timing of the next rate hike will also depend on developments in the United States, and market attention is expected to remain focused on developments before year-end.