Interest rates hit a 31-year high! The Bank of Japan raised rates by 25 basis points, paused tapering of bond purchases, and the Deputy Governor's press conference became a focal point.

The Bank of Japan officially announced a 0.25 percentage point increase in the benchmark interest rate to 1.00%, marking the highest level since September 1995 - on the eve of the beginning of a nearly thirty-year era of zero interest rates following the burst of Japan's "bubble economy". The rate decision was approved by a vote of 7 to 1, with the only dissenting vote cast by board member Tadashi Asada, who believed that the downward risks to production and employment from the Middle East situation outweighed the risks of rising prices, and advocated maintaining the current policy guidance. Additionally, the Bank of Japan unexpectedly announced a suspension of the reduction in bond purchases, deciding to maintain the monthly purchase volume of Japanese government bonds at around 2 trillion yen from April 2027 onwards. At the same time, Governor Haruhiko Kuroda remains hospitalized due to a liver cyst infection, leading to the Deputy Governor, Shinichi Uchida, presiding over the policy meeting for the first time since the implementation of the 1998 Bank of Japan Law. Uchida, widely regarded as one of the main architects of the Bank of Japan's policy framework over the past two decades, will assume the responsibilities of the Governor at the afternoon press conference. Although Governor Kuroda was unable to attend the vote in person, he had already submitted a written opinion expressing a positive inclination towards raising interest rates. Frederic Neumann, Chief Asia Economist at HSBC, pointed out that earlier this month, Kuroda had openly stated that the Middle East conflict and the sharp rise in oil prices were accelerating the upward movement of core inflation rates. Following the rate hike decision, the USD/JPY exchange rate briefly touched 160.28, approaching the widely viewed psychological intervention line of 160. Since last week, the yen exchange rate has remained around 160, aligning with the range that prompted the Japanese Ministry of Finance to intervene in the foreign exchange market at the end of April. The Nikkei 225 Index briefly extended gains, breaking through the 70,000-point mark for the first time in history. The conflict between the US and Iran poses a major challenge for "imported inflation," while wholesale inflation in Japan remains hot while retail prices remain tepid. Despite the temporary ceasefire and the temporary agreement to reopen the Strait of Hormuz between the US and Iran, the serious backlog in global maritime logistics continues to create tension in the supply chain. Hundreds of commercial ships are still waiting in line for safe passage, and for Japan, which heavily relies on Middle Eastern oil and gas, the energy crisis and the pressure on prices are looming. Data shows that wholesale prices in Japan surged more than 6% year-on-year in May, recording the fastest growth in three years; although the overall Consumer Price Index (CPI) in April was 1.4%, temporarily below the Bank of Japan's long-term target of 2%, the soaring costs upstream in the industry have completely stripped the Bank of Japan of the rationale for "maintaining policy flexibility." The difference in temperature between the wholesale and retail sectors exposes the underlying weakness in Japan's economic demand side - while businesses are grappling with the cost impact of imported energy, they are struggling to pass on the full burden of rising prices to consumers. This is the inherent dilemma of the interest rate hike decision: cost-push inflation caused by external energy shocks may not necessarily need to be addressed with interest rate tools, and raising rates may further suppress the already fragile domestic demand. The Bank of Japan predicts in its outlook that core CPI inflation will gradually rise to reach the level consistent with the price target between the second half of the 2026 fiscal year and the 2027 fiscal year, but also acknowledges that CPI growth rates may accelerate to significantly above 2%. Kuroda had previously stated on June 3 that he expected a significant increase in Japan's year-on-year CPI, especially concentrated in the 2026 fiscal year. Whether this "predicted acceleration" is sufficient to support a faster pace of interest rate hikes will be the most pressing question for the central bank going forward. In addition, the decision to raise interest rates is also aimed at stabilizing the yen exchange rate, which has been under pressure from major currencies such as the US dollar and the euro. Even with the rate hike, Japan's rates remain relatively low compared to other major economies. For example, the current rates in the US and the UK are above 3%, although the central banks of both countries are expected to maintain rates at this week's meetings. While a weaker yen enhances Japan's export competitiveness, it also exacerbates import inflation and puts pressure on the government's finances, as subsidies are needed to mitigate the impact of rising prices. Shinichi Uchida's "debut": Three suspenseful expectations management Governor Haruhiko Kuroda has been hospitalized for about two weeks due to a liver cyst infection and will miss this meeting and press conference. This is the first time the Bank of Japan has had a Deputy Governor preside over a policy meeting due to the health reasons of the Governor since the implementation of the 1998 Bank of Japan Law. As one of the main architects of the Bank of Japan's policy framework over the past two decades, Deputy Governor Shinichi Uchida will hold a press conference at 14:30 Beijing time. As a key player in the design and implementation of the Bank of Japan's policy framework over the past twenty years, Deputy Governor Shinichi Uchida has played a crucial role in the design and implementation of negative interest rate policies and yield curve control. The market will closely follow his remarks at the press conference - any signal hinting at the pace of future rate hikes will be a significant indicator for the next moves in the yen exchange rate. One of the suspenseful questions is whether Uchida will be a more hawkish or dovish messenger than Kuroda. Several institutions believe that Uchida is likely to reaffirm the determination to continue raising rates, but is unlikely to provide specific guidance on the timing of the next rate hike. Another suspenseful question is whether the absence of Kuroda will affect the original voting distribution of the board; whether there are other members with similar concerns behind Tadashi Asada's dissenting vote is currently unknown. The third suspense is whether the Bank of Japan's use of the wording in its official statement - "continue to raise policy rates based on the development of economic activity, prices, and financial conditions" - signifies a substantive hawkish commitment or a strategic adjustment to mitigate over-interpretation of the "dovish signal" from the pause in bond purchases? Uchida's interpretation will directly determine the market's reassessment of the Bank of Japan's true stance. Interest rate path under political constraints: The "invisible red line" of the Koike government The most implicit and crucial constraint facing the Bank of Japan's interest rate hike comes from the political level. Prime Minister Naoko Koike continues the policy preference of "Abenomics," vigorously advocating for maintaining an accommodating fiscal and monetary policy environment, believing that low interest rates and loose conditions are the only remedy to save the Japanese economy, and expressing clear opposition to rate hikes. The expansionary fiscal policy of the Koike government has put the Bank of Japan in a dilemma of "rate hikes causing a debt crisis while avoiding rate hikes worsening the devaluation of the yen and imported inflation." For the Koike government, the immediate priority is to control the rapid rise in interest rates and prevent fundamental shocks to the government's debt level approaching 250%. Multiple analysts point out that the Bank of Japan must seek a delicate balance between "avoiding angering the Koike Naoko government" and "preventing action that is too slow" on the policy path. This political pressure has already been reflected in the decision to halt the reduction in bond purchases - the most direct effect of this pause is to restrain a rapid increase in long-term interest rates, creating a stable environment for debt financing. If attempts are made to accelerate the frequency and magnitude of rate hikes, political resistance is likely to intensify. Therefore, the Bank of Japan is likely to adopt a slow pace of rate hikes every six months - which is also the main consensus prediction among 71% of economists surveyed on the Bank of Japan's policy pace. The Bank of Japan also faces a tricky balance: raising rates may help to lower inflation, but higher rates will also increase borrowing costs, adding to government and corporate expenses. "After two decades of deflation, Japan is now in an upward inflation cycle," Japanese economist Jesper Koll told the BBC. He added, "There is no longer a need for emergency/crisis management monetary policy, the Bank of Japan hopes to return to a normal monetary policy." Market pricing and outlook path: Probability of action in October still at 50% Prior to the announcement of the rate decision, the market had already priced in the June rate hike almost completely - speculative net short yen positions in the futures market were at their highest level since July 2024 as of June 12. This indicates that a large number of speculative positions are still betting on further depreciation pressure on the yen. The rate hike itself did not trigger a mass liquidation of these positions - if the market really believed that the Bank of Japan was embarking on a hawkish path of continuous rate hikes, yen shorts would not have maintained such substantial positions. As a result, the guidance from Uchida at the news conference will be crucial. Current interest rate swap market pricing shows that the probability of another rate hike in October after the June hike is about 50%. If the market's pricing probability for a rate hike in October rises to over 60%, and further exceeds 50% for a rate hike in March 2027, the market may interpret the situation at that time as "hawkish" and provide substantial support to the yen. From an institutional perspective, Bank of America expects the Bank of Japan to raise rates by another 25 basis points in October, followed by further rate hikes in March and July 2027, reaching a terminal rate of 1.75% by the end of 2027. Former Bank of Japan Executive Director Hideo Hayakawa has warned more aggressively that the Bank of Japan's current pace is clearly lagging behind the inflation curve and predicts the next rate hike as soon as October. ING also believes the next rate hike by the Bank of Japan is most likely to occur in October. However, the pause in the bond purchase program has already weakened the overall consistency of normalization signals. In the intertwining signals given by the Bank of Japan, the market will have to digest two policy directions pointing in opposite directions - "gradual rate hikes" and "continued quantitative easing." If Uchida's remarks at the news conference cannot clearly guide market expectations, investors will have to choose between the two signals, leading to even greater uncertainty in the yen's trajectory.