BOJ expected to lift policy rate to highest level since 1995 says Nikkei Shimbun

The Nikkei Shimbun reported that the Bank of Japan is preparing to raise interest rates at its June 15th & 16th Monetary Policy Meeting.

The BOJ is expected to lift its policy rate from 0.75 percent to 1.0 percent as it moves to guard against renewed upside risks to inflation.

Photo by ayumi kubo on Unsplash. BOJ in foreground.

If approved, it would be the BOJ’s first rate-hike since December 2025. It would also bring Japan’s policy rate to its highest level since 1995.

At the same time, the central bank is moving toward suspending further reductions in its Japanese government bond purchases from next spring.

That would reflect a delicate policy balance. Inflation risks are pushing the BOJ toward higher rates, while instability in the JGB market is forcing it to move more carefully on balance-sheet normalization.

BOJ Governor Kazuo Ueda and the central bank’s executive team are expected to submit a rate-hike proposal at the June 16 meeting.

According to the Nikkei, the proposal is likely to be approved by a majority of the BOJ’s nine-member Policy Board.

A separate proposal to slow the reduction of JGB purchases is also gaining support from more than half of the board. The BOJ is also reported to be discussing the issue with the government.

Inflation Risks Push BOJ Toward Higher Rates

The expected rate hike reflects growing concern inside the BOJ that higher crude oil prices, driven by tensions in the Middle East, could feed through into a wider range of goods and services.

Officials increasingly believe these pressures could lift underlying inflation, excluding temporary factors.

The BOJ’s preferred version of the consumer price index, which excludes the impact of government inflation-relief measures such as electricity and gas subsidies, rose 2.8 percent in April.

That was an acceleration from the 2.5 percent increase recorded in March.

According to the Nikkei, BOJ officials are concerned that companies are passing higher costs onto consumers more quickly.

The worry then is that delaying a rate hike could leave the central bank needing to tighten policy more aggressively later.

With the economic drag from Middle East tensions currently seen as limited, more BOJ officials appear to believe a rate-hike is needed to contain the risk of stronger inflation.

BOJ Considers Pausing JGB Purchase Reductions

The BOJ is also considering a pause in its program to reduce Japanese government bond purchases.

Under the current plan:

• The BOJ will continue cutting JGB purchases by JPY 200 billion each quarter through the January–March quarter of 2027.

• From April 2027, it is considering stopping further reductions.

• If adopted, the BOJ would continue buying JGBs at a monthly pace of JPY 2.1 trillion.

The BOJ bought large volumes of long-term government bonds under the aggressive monetary easing program it launched in 2013.

As such, BOJ share of the JGB market reached about 54 percent at its peak in 2023.

The central bank began reducing bond purchases in August 2024, reflecting concern that its dominant presence had weakened market function.

The goal then was to allow bond yields to be set more by investor trading, rather than by BOJ purchases, which largely happened as expected.

In May, the yield on newly issued 10-year JGBs briefly rose into the 2.8 percent range, the highest level in over 29 years for Japan’s benchmark long-term interest rate.

However, since 2025, the market has seen more frequent episodes of instability, including temporary sharp increases in interest rates.

Halting further reductions in JGB purchases could help ease supply-demand concerns and stabilize the market.

At the same time, the BOJ’s total JGB holdings would continue to decline as previously purchased bonds mature, allowing the central bank to maintain its broader normalization path.

According to the Nikkei, the BOJ will assess financial market conditions until just before the June meeting before deciding whether to halt further reductions.

Source:

Nikkei Shimbun (Japanese only; paywalled)