On September 18, the Bank of Japan announced it would raise the target for the uncollateralized overnight call rate, its policy rate, by 25 basis points to 1.25%, the highest level since 1995. This rate hike comes just three months after the June meeting, marking the shortest interval between rate increases since 1990.

The BOJ stated that Japan's economy has been recovering moderately, and there is a risk that underlying inflation could exceed the 2% target. From the perspective of achieving the 2% inflation target in a sustainable and stable manner, it is necessary to adjust the degree of monetary policy accommodation.

Far East Commentary

This rate hike by the Bank of Japan was primarily driven by dual pressures from inflation and yen depreciation. Conflict in the Middle East has pushed up international energy prices, and rising import costs have already been transmitted to businesses and consumers. Meanwhile, the yen has continued to weaken, briefly falling to 163.98 yen per dollar in July, a 40-year low. The combination of these two factors has forced the Bank of Japan to accelerate the pace of rate hikes.

Since September, the European Central Bank, the Federal Reserve, and the Bank of Japan have all shifted toward tighter monetary policy simultaneously. The common cause is that the Middle East situation has driven up energy prices, challenging inflation targets across the board. However, each has different reasons for raising rates: the U.S. economy remains relatively strong, making its rate hike a proactive choice to prevent inflation from becoming unanchored. The eurozone faces weak growth alongside sharply rising inflation, with its policy space clearly squeezed. The Bank of Japan is mainly affected by imported inflation stemming from yen depreciation, representing an exchange-rate-driven "catch-up policy shift."

The synchronized tightening by the three major central banks is essentially a differentiated response to the energy shock: the U.S. is engaging in "proactive tightening" to suppress inflation, Europe is mired in a stagflation dilemma, and Japan is constrained by sustained exchange rate pressure. In the short term, fighting inflation will remain the primary consideration for global central bank monetary policy.