Japan’s central bank made a significant move by raising its benchmark interest rate to “around 0.25%” and announcing plans to taper its bond buying program. This decision marks the highest interest rates set by the Bank of Japan since 2008. Despite the rate increase, the central bank expects real interest rates to remain negative and anticipates that accommodative financial conditions will continue to support economic activity.
The Bank of Japan forecasts that the core inflation rate, excluding prices of fresh food, will reach 2.5% by the end of the 2024 fiscal year. For the following years, 2025 and 2026, the inflation rate is projected to be around 2%. The central bank stated that it will continue to raise the policy interest rate and adjust monetary accommodation levels based on the realization of its economic outlook.
In an effort to taper its bond buying program, the Bank of Japan plans to reduce its monthly outright purchases of Japanese government bonds to approximately 3 trillion yen per month in the January to March 2026 quarter. This represents a significant decrease from the previous amount of around 6 trillion yen per month. The reduction is expected to bring total JGB holdings down by about 7% to 8% by the 2026 fiscal year.
While the Bank of Japan has laid out a clear plan for reducing its bond purchases, it emphasized its flexibility in the strategy. The central bank announced that it will conduct an interim assessment of the reduction plan at the June 2025 meeting and make adjustments if necessary. The bank is prepared to increase the amount of JGB purchases or amend the plan as needed to address changing economic conditions.
Following the central bank’s decision, both the Nikkei 225 and the Topix saw gains, with increases of 0.28% and 0.51% respectively. Additionally, the Japanese yen strengthened marginally to 152.72. The Bank of Japan highlighted that Japan’s economic activity and prices have been aligning with the outlook presented in April. Wage increases have been observed not only in large corporations but also in smaller firms, contributing to a virtuous cycle of rising prices and wages.
Business fixed investment has been on a moderate increasing trend, while corporate profits have been improving. Despite the impact of price rises, private consumption has remained resilient. The central bank revised its GDP growth forecast for the 2024 fiscal year slightly downward to a range of 0.5% to 0.7% due to previous downward revisions of GDP numbers for 2023. The GDP and inflation expectations for the 2025 and 2026 fiscal year have largely remained consistent with previous forecasts.
The Bank of Japan’s decision to raise interest rates and taper its bond buying program reflects its confidence in the country’s economic outlook. By carefully monitoring economic indicators and remaining flexible in its strategies, the central bank aims to support sustained economic growth and stability in the coming years.
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