The Japanese national flag is seen at the Bank of Japan (BoJ) headquarters in Tokyo on July 31, 2024. The Bank of Japan lifted its main interest rate on July 31 for just the second time in 17 years in another step away from its massive monetary easing programme.
Kazuhiro Nogi | Afp | Getty Images
Japan’s central bank on Thursday kept benchmark interest rates steady at 0.5% in its first meeting after Sanae Takaichi took power as the country’s prime minister earlier this month.
The decision was in line with expectations from economists polled by Reuters, and comes even as inflation has stayed above the central bank’s 2% target for 41 months in a row.
The Bank of Japan said the decision was split 7-2, with board members Naoki Tamura and Hajime Takata proposing a 25 basis point hike.
Market reaction to the expected decision was relatively muted, with Japanese 10-year bond yields little changed, the yen 0.2% weaker at 153.03, while the Nikkei stock index was up 0.4%.
This BOJ verdict comes as U.S. Treasury Secretary Scott Bessent on Monday met with Satsuki Katayama, the new finance minister in the Takaichi administration, and appeared to take aim at Tokyo over the yen’s weakness, even commenting on the country’s monetary policy.
In a statement on Tuesday, the U.S. Treasury Department said that Bessent “highlighted the important role of sound monetary policy formulation and communication in anchoring inflation expectations and preventing excess exchange rate volatility.”
Higher interest rates tend to strengthen a currency by inviting foreign flows, while lower rates tend to weaken it.
The weak yen has been a sticking point for the U.S. President Donald Trump, who said in March that Tokyo had weakened its currency to gain an unfair trade advantage.
Trump met with Takaichi, who has been an advocate of lower interest rates and has called BOJ’s rate hikes as “stupid” in the past.
While Takaichi appears to have softened her stance, this push to strengthen the yen is still at odds of with her plans for massive fiscal spending and a loose monetary policy.
“What’s most important is for the BOJ and government to coordinate policy and communicate closely,” Takaichi said on Oct. 21, according to Reuters.
Takaichi is seen as a proponent of “Abenomics,” the economic strategy of the late Shinzo Abe that espoused loose monetary policy, fiscal spending and structural reforms.
On Wednesday, Bessent wrote on X that “the government’s willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations.”
Katayama said in March that yen’s real value was likely at about 120-130 against the dollar, about 26% stronger than the current level of around 152.
Takaichi’s policies are likely to devalue the yen, according to experts, something that has already happened in the so-called “Takaichi trade” that saw the Nikkei 225 hit record levels and the yen weaken beyond the 150 level against the dollar.
The BOJ’s decision also comes against the backdrop of a relatively weak export landscape. Japan’s exports contracted for four straight months, before seeing a rebound in September, although shipments to the U.S. have still been declining.