Photo/Illutration The Bank of Japan head office in Tokyo's Chuo Ward (Asahi Shimbun file photo)

Four months after a historic departure from the negative interest rate policy, the Bank of Japan announced on July 31 that it will hike interest rates to around 0.25 percent.

On the final day of its two-day policy board meeting, the BOJ also decided to halve its monthly purchase of government bonds to about 3 trillion yen ($19 billion) by the first quarter of 2026.

Investors bought the yen following the announcement, sending the Japanese currency to the 151-yen range against the dollar at one point, its strongest level in more than four months.

BOJ Governor Kazuo Ueda explained the reasons for the policy change at a news conference.

“Japan’s economic activity and prices have been developing generally in line with the outlook we presented. Still, the year-on-year rate of change in import prices has turned positive again and upside risks to prices require attention,” Ueda said.

“In view of these circumstances, at today’s meeting, we judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent.”

Ueda added that the BOJ will continue to raise interest rates if the economic activity and prices move in accordance with the outlook.

He also said that he does not believe that the latest hike will have a major adverse impact on the economy, saying that the interest rate is still at an extremely low level.

The short-term policy interest rate currently stands at 0-0.1 percent.

Specifically, the central bank will guide the uncollateralized overnight call rate, a rate commercial banks charge on loans to each other, to about 0.25 percent, by raising the rate on deposits commercial banks park at the BOJ from 0.1 percent to 0.25 percent.

The BOJ ended its 11-year, large-scale monetary easing policy in March and raised short-term interest rates for the first time in 17 years.

At the latest meeting, the central bank decided on specifics of the quantitative-tightening program to scale back purchases of government bonds that it announced in June.

This, combined with the interest rate hike, is expected to lead to higher interest rates on housing loans and loans to corporate borrowers.

The BOJ has been buying a large amount of government bonds to funnel money into the economy, to keep interest rates low and prop up the economy.

The central bank’s holdings of government bonds have swollen to about 580 trillion yen, accounting for more than half of the value of outstanding government bonds.

Currently, the BOJ buys about 6 trillion yen worth of government bonds a month.

It plans to taper the monthly purchase value by about 400 billion yen every quarter until it shrinks to about 3 trillion yen in the January-March period of 2026.

If long-term interest rates should spike, the BOJ said it will buy government bonds without limitation to contain the rates.

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