The central bank raised its interest rate to 1%, the highest since September 1995 influenced by inflationary pressures and a weakened yen.
It had raised its policy rate for the first time since December the previous week.
The yen is currently close to its weakest level in four decades against the dollar amid caution against an increase in Federal Reserve rates this year. The yen was trading at 161.68 at the close of trading in Tokyo on Wednesday, June 24.
The BOJ will closely monitor inflationary pressures and foreign exchange impact on the country’s economy.
A member of the nine-member board said that it was appropriate for the bank to continue to raise the policy interest rate considering that the consumer price index (CPI) inflation had been approaching 2% and financial conditions were turbulent, according to a summary of the board meeting that was released on Wednesday, June 24. The summary has accelerated expectations of further changes in the rate by the year-end.
A Bloomberg survey of economists showed that the about 90% of them predicted a move by December, while a third stressed on October. The economists recently changed their outlook to 1.75% from 1.5% earlier this month.
The summary showed that some board members sought for another hike in the subsequent months as the latest benchmark rate was the lowest major world economies.
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A member called 2% a neutral interest rate calling it desirable to raise the rate as per requirement keeping a few intervals. This was backed by an opinion to bring it to the neutral rate as soon as possible. The BOJ has estimated a neutral level between 1.1% and 2.5%.
Service prices for businesses had risen to 3.3% for the third consecutive month according to another BOJ report released Wednesday, June 24
Governor Kazuo Ueda was hospitalized on June 9 with a liver cyst infection, marking the first policy meeting since 2010 to take place without a governor present. He was discharged earlier than expected last week.
Prime Minister Sanae Takaichi is viewed as a potential obstacle to Ueda’s rate-normalisation efforts. Toichiro Asada, Takaichi’s first appointee to the BOJ board, opposed last week’s rate hike, while another appointee, Ayano Sato, is set to join the board at the end of the month.
Before last week’s meeting, economic policy minister Minoru Kiuchi, attending as the government’s representative, said he “strongly” expected the bank to coordinate with the government.
The meeting summary indicated rising tensions, noting that a Cabinet Office official reminded the board of its responsibility to communicate its rate decision and stated that the bank should explain the rate hike while acting proactively and appropriately if economic activity fluctuates excessively.
