Ammon News - The Bank of Japan raised interest rates to a 31-year high on Tuesday, ​marking another landmark step in normalising monetary policy as it focused on taming price pressures from the energy shock caused by the Iran war.

The hike ‌was the first since December and aligns the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.

Deputy Governor Shinichi Uchida acknowledged the recent U.S.-Iranian peace deal, which he described as a "welcome move", but noted persistent inflationary risks.

"Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening and there is a ​risk underlying inflation may deviate from our target," Uchida said in a news conference he held on behalf of Governor Kazuo Ueda, who missed the meeting ​for medical treatment.

In a widely expected move, the BOJ decided to raise its short-term policy rate to 1% from 0.75%, taking borrowing costs ⁠to levels unseen since 1995.

In a statement announcing the decision, the BOJ said the risk of Japan's economy deteriorating sharply from the Middle East conflict has diminished due to ​progress made in procuring alternative energy supplies.

The price outlook, on the other hand, warranted attention as companies were seen passing on rising oil costs to each other at a "relatively fast pace," ​which could push up consumer prices across a wide range of items, it said.

"Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target," the BOJ said.

The decision was made by a 7-1 vote. Toichiro Asada, who joined the board in April as the first member to be hand-picked by dovish premier Sanae ​Takaichi, dissented on the view downside risks to growth from the Middle East conflict were bigger than inflation risks.

"If anything, the focus had been on whether a 50-bp rate hike ​would be proposed, but no such proposal was made. In terms of the future rate-hike path, this is positive for risk asset prices, as it suggests that a sharp rate hike is likely ‌to be ⁠avoided," said Hirofumi Suzuki, chief FX strategist at SMBC.

Wall Street's main indexes rallied on Monday, with the Dow gaining nearly 1% to notch a record-high close,

The BOJ also decided to pause its bond taper programme from April next year and continue to buy roughly 2 trillion ​yen ($12.5 billion) in Japanese government bonds (JGB) per ​month.

It will discontinue its practice of conducting ⁠a review of its bond taper plan each year, but stand ready to amend the pace of purchases if necessary at future policy meetings.

The Middle East conflict has complicated the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting ​an economy heavily reliant on imported fuel.

While the peace deal between the U.S. and Iran eased market fears over global inflationary pressures, wholesale ​inflation spiked to a ⁠3-year high of 6.3% in May in a sign companies were already passing on higher costs from the energy shock.

Analysts expect core consumer inflation to accelerate back above the BOJ's 2% target later this year, after sliding below the level on government subsidies aimed at curbing utility bills.

A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under ⁠pressure to stay ​on course for further rate hikes, analysts say.

The BOJ's hike comes amid a busy week for global ​central banks. The U.S. Federal Reserve is widely expected to hold its benchmark interest rate steady on Wednesday but officials have recently signaled their rising concern about inflation, which has led more in the market to now predict ​its next move as being a hike rather than a cut.

($1 = 160.2100 yen)


Reuters