Japan’s central bank held its benchmark interest rates steady at 0.5% on Thursday, marking its first policy meeting since Sanae Takaichi assumed the office of Prime Minister earlier this month.
The decision aligned with economists’ expectations surveyed by Reuters, despite inflation remaining above the central bank’s 2% target for 41 consecutive months.
Split Decision Among Board Members
The Bank of Japan (BOJ) announced that the vote was split 7-2. Board members Naoki Tamura and Hajime Takata proposed a 25 basis point increase, which was ultimately rejected.
Market reaction was relatively muted. Japanese 10-year bond yields showed little movement, the yen fell 0.2% to 153.03 against the dollar, while the Nikkei stock index rose 0.4%.
Analysts Anticipate Gradual Changes
Krishna Bhimavarapu, APAC Economist at State Street Investment Management, noted in a post-decision report that there was an “increased likelihood” of a rate hike within the next two policy meetings, depending on the assessment of global trade-related volatility.
“Nonetheless, the Bank is still likely to move only gradually in the next year as well,” she added.
U.S. Concerns Over Yen Weakness
The BOJ’s decision coincides with heightened attention from the United States. On Monday, U.S. Treasury Secretary Scott Bessent met Satsuki Katayama, the new Finance Minister under Takaichi, and expressed concerns over the weakening yen, implicitly addressing Japan’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 typically strengthen a currency by attracting foreign investment, whereas lower rates tend to weaken it.
Takaichi’s Approach to Monetary Policy
The weak yen has long been a concern for former U.S. President Donald Trump, who claimed in March that Tokyo had intentionally devalued its currency to gain an unfair trade advantage. Trump has met with Takaichi, who previously criticised the BOJ’s rate hikes as “stupid” and has historically supported lower interest rates.
Although Takaichi appears to have moderated her stance, her efforts to strengthen the yen conflict with plans for expansive fiscal spending and a loose monetary policy.
“What’s most important is for the BOJ and government to coordinate policy and communicate closely,” Takaichi told Reuters on 21 October.
Continuation of Abenomics
Takaichi is regarded as a proponent of “Abenomics,” the economic strategy of the late Shinzo Abe, which promotes a combination of loose monetary policy, fiscal stimulus, and structural reforms.
On Wednesday, Bessent emphasised on X that “the government’s willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations.”
Katayama previously stated in March that the yen’s real value likely lies around 120-130 against the dollar, approximately 26% stronger than its current level of roughly 152.
Experts predict that Takaichi’s policies will continue to weaken the yen—a trend already observed in the so-called “Takaichi trade,” which saw the Nikkei 225 reach record highs while the yen weakened past 150 against the dollar.
Export Challenges
The BOJ’s decision also comes amid a challenging export environment. Japan’s exports had contracted for four consecutive months before rebounding in September, although shipments to the United States continue to decline.