TOKYO — The Bank of Japan raised interest rates Friday to a 31-year high, but a cautious forward guidance and two dovish dissenters within the board sent the yen sliding as traders repriced expectations for future hikes.
Governor Kazuo Ueda said the pace of further rate increases would depend on how inflation develops, signaling a data-dependent approach rather than a preset tightening schedule. "We shouldn't rule anything out," Ueda said.
Ueda specified that significant or consecutive rate hikes would come only if Japan faced "very big inflation risks" or inflation "sharply overshoots our target." He cited the U.S. and European central banks as precedents for such responses, adding that the BOJ aims to act preemptively to avoid sharp increases that could damage growth.
Underlying inflation in Japan has not yet reached 2 percent, Ueda noted. The central bank shifted its objective from pushing inflation higher to stabilizing it near that level—a marked change for a nation that spent decades fighting deflation.
Ueda acknowledged that determining whether inflation has stabilized "will take time," but added: "that's not to say we will wait until we have a clue." The BOJ will weigh upside price risks and financial conditions when setting the pace and size of future moves.
Medium- and long-term inflation expectations have risen, Ueda confirmed, alongside strong recent wage data that signal broadening wage pressures across the economy.
A sustained rise in energy costs poses additional risk to wholesale and consumer inflation. Ueda noted that Middle East conflict-driven energy inflation is a shared concern among the European Central Bank and the Federal Reserve.
Strong spending on artificial intelligence is also adding mild inflationary pressure while supporting growth globally, a factor influencing central banks worldwide. The BOJ guides policy by monitoring how currency swings affect domestic inflation, and the yen's post-hike decline suggests traders are pricing a slower tightening path than the market had expected—or are betting on relative hawkishness from other central banks outweighing Japanese caution.
