Recently, Japan’s central bank made a significant move by raising its benchmark interest rate to “around 0.25%”, a substantial increase from its previous range of 0% to 0.1%. Additionally, the Bank of Japan outlined its plan to taper its bond buying program, marking its highest interest rates since 2008. Despite this increase, the central bank emphasized that real interest rates are expected to remain “significantly negative” and that accommodative financial conditions will continue to support economic activity.
The Bank of Japan forecasts that the core inflation rate, which excludes fresh food prices, will reach 2.5% by the end of the 2024 fiscal year. Looking ahead, the bank anticipates an inflation rate of “around 2%” for both the 2025 and 2026 fiscal years. These projections are based on the assumption that the economic outlook is realized, allowing the central bank to continue raising the policy interest rate and adjusting monetary accommodation.
Reduction in Bond Purchases
As part of its plan to taper the bond buying program, the Bank of Japan announced a reduction in the monthly outright purchases of Japanese government bonds to about 3 trillion yen ($19.64 billion) per month in the January to March 2026 quarter. This significant decrease from the previous 6 trillion yen per month in JGB purchases is expected to bring total JGB holdings down by approximately 7% to 8% by the 2026 fiscal year. The central bank plans to be flexible in its approach and will conduct an interim assessment of the reduction plan at the June 2025 meeting, allowing for adjustments as needed.
Following the central bank’s decision, both the Nikkei 225 and the Topix experienced gains of 0.28% and 0.51% respectively, while the Japanese yen strengthened marginally to 152.72. The Bank of Japan highlighted that Japan’s economic activity and prices have been developing in line with the forecast presented in April. Notably, wage increases have been observed in both large and small firms, with the largest wage hike in 33 years reported by the Japanese Trade Union Confederation. This aligns with the central bank’s goal of creating a “virtuous cycle” of increasing prices and wages.
Despite positive developments in wages and business investment, the Bank of Japan slightly lowered its GDP growth forecast for the 2024 fiscal year to a range of 0.5%-0.7%, down from the previous forecast of 0.7%-1% in April. This adjustment was made due to downward revisions of the 2023 GDP numbers. However, both GDP and inflation expectations for the 2025 and 2026 fiscal years remain largely unchanged, indicating a relatively stable outlook for the Japanese economy.
The Bank of Japan’s decision to raise interest rates and taper its bond buying program reflects its commitment to managing economic conditions and achieving sustainable growth. By carefully adjusting monetary policy and closely monitoring market developments, the central bank seeks to support economic activity while addressing inflationary pressures and maintaining financial stability.
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