Laying the Groundwork for Future Rate Hikes?

On Thursday morning, following the U.S. Federal Reserve's decision to keep interest rates unchanged, the Bank of Japan (BOJ) also unanimously decided to maintain its current interest rates.

However, unlike the Fed, the BOJ sent a hawkish signal: if Japan's economic and inflation growth aligns with its projections, it will raise interest rates in the future. Additionally, the BOJ revised upward its inflation and economic growth forecasts for 2025.

BOJ Stands Pat

The BOJ kept its benchmark policy rate steady at 0.5%, with all nine members of its monetary policy board supporting the decision. This was in line with market expectations, as uncertainty over recent U.S. trade tariffs and Japan's political outlook had led to widespread anticipation that the BOJ would hold rates steady.

The BOJ now expects Japan's core CPI (excluding fresh food and energy prices) in 2025 to be between 2.8% and 3.0%, up from its previous forecast of 2.2%-2.4%.

The overall CPI is also projected to be in the range of 2.7% to 2.8%, higher than the earlier estimate of 2.0% to 2.3%.

The BOJ also slightly raised its 2025 GDP growth forecast from 0.4%-0.6% to 0.5%-0.7%.

Hawkish Signals

The BOJ stated that, given Japan's real interest rates remain at "very low levels," it will "continue to raise policy rates and adjust the degree of monetary easing" if its economic projections materialize.

The BOJ's hawkish tone strengthened the yen significantly, with the USD/JPY exchange rate falling 0.5% to 148.74. Japanese stocks remained optimistic, with the Nikkei 225 rising nearly 0.6%.

As early as July, BOJ Governor Kazuo Ueda had hinted at similar signals, preparing markets for potential hawkish moves. At 14:30 Beijing time on Thursday, Ueda will hold a press conference, where his remarks on future prospects will be closely watched.

Overall, the BOJ's decision was largely in line with expectations. A week earlier, Prime Minister Shigeru Ishiba's ruling party had lost its majority in the upper house of parliament, leading to widespread anticipation that the BOJ would stand pat this month amid heightened political uncertainty.