Bank of Japan Raises Interest Rates, Outlines Bond Taper Plan

JAPAN - TOKYO. The Bank of Japan raised interest rates on Wednesday and unveiled a detailed quantitative tightening plan, taking another landmark step towards phasing out a decade of massive stimulus.

The decision, which defied dominant market expectations for the BOJ to stand pat on rates, takes its short-term policy rate to levels unseen since 2008.

At the two-day meeting ending on Wednesday, the BOJ's board decided to raise the overnight call rate target to 0.25% from 0-0.1% in a 7-2 vote.

It also decided on a quantitative tightening (QT) plan that would roughly halve monthly bond buying to 3 trillion yen, from the current 6 trillion yen, as of January-March 2026.

"Despite sluggish consumer spending, monetary officials sent a decisive signal by raising interest rates and allowing for a more gradual balance sheet reduction," said Fred Neumann, chief Asia economist at HSBC.

"Rising inflation expectations also open the path for ongoing monetary policy normalisation by the BOJ. Barring major disruptions, the BOJ is on course to tighten further, with another interest hike by the start of next year," he said.

BOJ Governor Kazuo Ueda is expected to hold a news conference at 3:30 p.m. (0630 GMT) to explain the decision.

The decision came as the U.S. Federal Reserve looks to cut interest rates, possibly as early as September, reversing an aggressive rate-hike cycle that drove up the dollar and caused a painful yen sell-off for Japan.

More than three-quarters of economists polled by Reuters on July 10-18 had expected the BOJ to keep rates steady this month.

The BOJ ended negative rates and bond yield control in March in a landmark shift away from its radical stimulus programme.

Ueda has said the BOJ will hike rates further if it becomes convinced that rising wages will prop up services prices, and keep inflation durably around its 2% target.

He has also said the BOJ would aim to take short-term rates to levels that neither cool nor stimulate growth - seen by analysts as somewhere between 0.5% and 1.5% - in coming years if inflation is seen sustainably hitting 2% as it projects.