TOKYO, Aug. 1 (Xinhua) -- Japan's central bank concluded its monetary policy meeting on Wednesday with decision to raise policy rate and cut back on government bond purchases, considered as a big step to shift monetary easing and closely watched by the market.
The rise to 0.25 percent from the previous range of zero to 0.1 percent marked the first rate hike since the Bank of Japan (BOJ) ended its negative interest rate policy in March, while the BOJ announced plans to gradually halve its monthly government bond purchases to about 3 trillion yen (about 20 billion U.S. dollars) by March 2026.
BOJ Governor Kazuo Ueda told a press conference that the economy was slowly recovering, with large companies securing wage increases in spring labor negotiations. Inflation remained in a positive cycle, and inflation rate is gradually rising.
He said that despite the rate hike, interest rates remained very low, ensuring a loose financial environment that would not heavily impede economic growth. Should economic and price conditions meet or exceed expectations, further rate hikes may be considered.
Addressing market concerns about reduced government bond purchases, Ueda said that the decision took market participants' views into account and the BOJ would maintain flexibility in bond market measures. He projected a reduction of 7 to 8 percent in the BOJ's bond holdings under the current plan, still above long-term ideal level.
According to Japanese newspaper Nihon Keizai Shimbun, there were dissenting voices in the meeting, advocating for more cautious data-based confirmation of economic improvement due to wage increases before raising rates.
The market reacted strongly to the policy adjustment. A surge in traffic temporarily crashed the BOJ's website before the announcement, reflecting intense market attention, a contrast to the March meeting ending negative rates.
The rate hike announcement triggered significant responses across the forex market, bond market and large banks.
On Wednesday, the yen sharply appreciated against the U.S. dollar, breaking the 150 mark and gaining over 4 yen in one day, reaching a four-month high. The bond market saw a rapid increase in yield. The benchmark 10-year government bond yield rose 0.065 percentage points to 1.060 percent, with notable increases in yield of newly issued two-year and five-year bonds.
The Tokyo stock market experienced a sharp decline in early trading on Thursday, with the benchmark Nikkei stock index, the 225-issue Nikkei Stock Average, dropping nearly 3.5 percent and TOPIX falling about 3.9 percent.
In the banking sector, large banks began raising interest rates. Mitsubishi UFJ Financial Group (MUFG) announced on Wednesday that it would increase its short-term benchmark rate from 1.475 percent to 1.625 percent on Sept. 2, the first hike since March 2007. Other major banks and regional banks are expected to follow suit.
This rate increase will affect housing loans, as they are tied to the short-term benchmark rate.
Regional banks tie small and medium-sized enterprise loan rates to the short-term benchmark rate, indicating more burdens for those enterprises.
On the other hand, rate hike will benefit household savings. ■