On Friday, the Japanese yen got stronger, and the interest rates on government bonds hit their highest levels in years. This happened because the Bank of Japan decided to raise interest rates, just like people expected, and also updated its predictions about inflation. At the same time, Japan’s Nikkei stock index dropped slightly by 0.07%, closing at 39,931.98 points. Earlier in the day, the index had actually gone up by 0.6% right before the Bank of Japan made its announcement.
After the news, the yen climbed up to 154.845 per dollar, increasing by 0.8%. But by the time of Governor Kazuo Ueda’s news conference, the yen fell back to 155.56. During the conference, Ueda mentioned that the rise in prices was not that fast and that they weren’t in a hurry to raise rates again soon.
The yield on two-year Japanese government bonds went up a little to 0.725%, a number not seen since October 2008, and stayed at 0.715%. Also, 10-year bond futures went up a bit to 140.78 yen. Remember, when bond prices go up, the yields usually go down.
Kota Suzuki, a strategist at Nomura Asset Management, thinks the rates will stay the same for at least the next six months, and the Bank of Japan will be extra careful to check how the economy is doing after the rate hike. They raised short-term lending rates by a quarter point to 0.5%, a move that markets had already expected.
In their report, the Bank raised its prediction for core consumer inflation to 2.4% for fiscal 2025 and then slowing down to 2.0% in 2026, compared to earlier estimates of 1.9% for both years. The market is now expecting one more rate increase by the end of the year, likely in December.
Shoki Omori, a strategist at Mizuho Securities, said that investors thought the outlook report was a bit aggressive. Even though yields are higher, the trading volume isn’t that much, indicating mixed reactions. Earlier, Japanese shares gained ground thanks to a 0.5% rise in the U.S. S&P 500, which marked a record close.
Lastly, the yen found support after U.S. President Donald Trump said he was optimistic about reaching a trade deal with China, which might help avoid more tariffs.
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