On December 19, ATFX Forex Commentary: The Bank of Japan (BOJ) announced its December rate decision today, raising interest rates by 25 basis points (bps). The benchmark rate increased from 0.5% to 0.75%, marking the highest level since September 1995. In March 2024, the BOJ hiked rates by 20bps, officially exiting negative interest rate policies and initiating monetary policy normalization. Subsequent increases of 15bps in July 2024 and 25bps in January 2025 have steadily pushed rates higher. With this latest 25bps hike, the BOJ is now just one step away from the critical 1% threshold.
In its policy statement, the BOJ noted that Japan's economy is experiencing a moderate recovery, with core inflation expected to rise gently. It emphasized continued rate hikes as economic and price conditions improve. The explicit mention of "raising policy rates" signals a consensus within the BOJ for further tightening. Should CPI and GDP growth remain robust, the central bank may exceed 2025's two rate hikes in 2026.
BOJ Governor Kazuo Ueda reiterated the policy stance in a press conference: "If the economy and prices develop as projected, the BOJ will continue raising policy rates." His hawkish tone bolstered the yen. The USD/JPY pair initially dipped post-announcement but rebounded sharply, ending higher. A similar pattern followed Ueda's remarks, with gains far outweighing losses.
Why did USD/JPY ultimately rise (i.e., yen depreciation) despite BOJ's rate hike and Ueda's supportive comments? This paradox extends to the daily chart. While the BOJ tightens and the Fed eases, the dollar has appreciated against the yen since April 2024.
Key factors include the BOJ's gradual pace—just 50bps cumulative hikes over a year—and its sub-1% benchmark rate versus the Fed's 3.5%-3.75% after three cuts. With U.S. rates still five times Japan's, global capital favors the dollar.
Economically, Japan's November core CPI held steady at 3%, capping the mild inflation range, while quarterly GDP growth remained positive since Q3 2024, peaking at 2%, signaling strong recovery.
Though yen depreciation persists, a sustained appreciation cycle may emerge once the BOJ-Fed rate gap narrows sufficiently.
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