Bank of Japan Raises Policy Rate to 31-Year High

Japan's nation-wide core consumer prices increased at the fastest pace in more than three decades as the Bank of Japan adopts tougher rhetoric on containing inflation as price growth continues to accelerate. The core consumer prices climbed 2.8% from a year ago in August, slightly below economists' estimate of 2.9% but still the fastest pace since November 1991. The core inflation represents prices excluding volatile fresh food costs, which rose 4.2% from a year earlier, the fastest since 1981, matching July's gain.

Consumer price gains have exceeded the BOJ's 2% target since last year, leading policymakers to take a step back from its ultra-loose stance of the past two decades.

BOJ decides today whether to go for the first rate increase since 2015 by choosing a firm stance of whether inflation has gone stable enough to prevent further dollar/yen weakness. The Bank of Japan raised its short-term benchmark rate to 1.25%, the highest level in three decades, on Wednesday, a move driven by expectations of a more aggressive monetary policy decision. BOJ announces a 25-basis-point hike in its policy rate decision from 1% after a two-day deliberation, voting 7-2 in favor of the decision, with markets widely priced in the rate hike while the move steered the gauge away from the ultra-loose monetary policy. BOJ Governor Kazuo Ueda hinted at more rate hikes to come.

"Given the move of inflation approaching 2%, the BOJ has entered a different phase of its fight against inflation," Ueda said at a press conference.

"The central bank has now shifted away from an easing bias of targeting an inflation rate towards stable inflation rather than targeting higher inflation away from a flexible policy." The BOJ governor also didn't rule out another rate increase in October, saying that the central bank could apply sequential adjustments in the monetary policy and would not rule out a large 50-basis-point hike or consecutive policy rate hikes depending on inflation risks. But the BOJ also wants to move early enough to avoid the need to accelerate a tightening ahead of schedule, Ueda added.

Japan's inflation prospects have become more complex due to soaring energy costs and expectations of higher inflation. Japan's core consumer prices held steady near the BOJ's 2% target in August and solid wage growth supports concerns of broader price inflation. Yet, the yen weakened against the U.S. dollar after the rate decision, with traders focusing on the two dissenting BOJ policymakers and the lack of guidance on timing of future rate increases.

The dollar was at about 157.90 yen, while traders remain on alert for Japan to intervene again to support the currency.

The BOJ decision also comes as other major central banks adjust to renewed inflation risks with the U.S. Federal Reserve raising its policy rate last week to 3.75% to 4% and the European Central Bank's rate remaining above Japan's. The BOJ remains with significantly lower borrowing costs than the major global peers. Japan's next step will be assessing how high rates can go without putting undue stress on the economy and financial markets.

Ueda said the BOJ will closely analyze inflation, wages, exchange rates and financial conditions before making adjustments to its monetary policy.