"Need to increase the intensity!" The Bank of Japan's rate hike was unable to dispel market concerns, leading to the yen giving back its gains and Japanese bonds coming under pressure.

On Tuesday, the Bank of Japan officially announced a 25 basis point rate hike, as the market speculated that the Bank of Japan may need to take more decisive action to support the yen and curb inflation. The yen against the dollar reversed some of its gains, and Japanese government bond prices fell. The yen against the dollar was at 160.186, previously hitting 160.05. The 10-year sovereign bond yield rose by 8 basis points, while the 20-year and 30-year yields also surged by a similar magnitude. The Nikkei 225 index briefly touched the key psychological level of 70,000 points. Investors will focus on Deputy Governor Shinichi Uchida's press conference after the policy decision. On Tuesday, the Bank of Japan officially announced a 0.25 percentage point increase in the benchmark interest rate to 1.00%, the highest level since September 1995 - the eve of the start of the nearly thirty-year era of zero interest rates following the bursting of the Japanese "Bubble Economy". One member of the Bank's Policy Board, Toichiro Asada, cast a dissenting vote against the widely expected 25 basis point rate hike (to 1%), with the rate decision approved by a 7-1 vote. The sole dissenting member of the Policy Board believed that the downside risks to production and employment from the Middle East situation were greater than the upside risks to prices, and advocated maintaining the current policy guidance. Alex Loo, Senior Asia Economist at TD Securities in Singapore, said, "To eliminate the depreciation trend of the yen, we believe the Bank of Japan's guidance needs to convince market participants that either its rate hike pace will be faster than every six months, or its eventual policy rate target will be higher than 1.50%." Despite gradually raising borrowing costs, the yen continues to come under pressure. Just last week, despite record-breaking currency intervention by Japan, the yen against the dollar still hit its weakest level since April. The Bank of Japan also announced that it will maintain its monthly purchase of about 2 trillion yen (about $125 billion) in government bonds from April 2027, indicating a halt to the pace of reducing bond purchases. Tai Hui, Chief Market Strategist for Asia Pacific at J.P. Morgan Asset Management, pointed out, "This indicates that the central bank remains cautious in tightening policy, unwilling to be too aggressive, and inclined to normalize its balance sheet in exchange for normalizing interest rates." Amid inflation concerns sparked by the US-Iran war and the Bank of Japan's cautious stance, Japanese government bond yields rose to multi-year highs last month. Strategist Garfield Reynolds said, "The dissenting vote in this rate hike, and the policy statement suggesting that policymakers may take time to assess economic conditions, could exacerbate traders' anxiety that the Bank of Japan may fall further behind the curve." With Governor Kazuo Ueda absent from this meeting due to illness, there is uncertainty about how the central bank will communicate its policy decision at the press conference at 3:30 pm Beijing time today. Charu Chanana, Chief Investment Strategist at Shengbao Markets, believes that the market may be sensitive to this, as there is less familiarity with Deputy Governor Shinichi Uchida, even though the Deputy Governor is unlikely to deviate from Ueda's stance. Due to the significant interest rate differential between the US and Japan, any guidance on the pace of the Bank of Japan's next actions will be a key variable for the yen. Meanwhile, concerns about the Bank of Japan's insufficient rate hikes and slow action have caused some global funds to withdraw from the Japanese government bond market. Chanana added, "If the dollar remains stable above 160 after the rate hike, intervention risks will continue to exist - especially as the Federal Reserve's decision approaches, if the background shows a softening dollar, it may provide a better window for Japanese authorities to act." This rate hike is the first since December last year, and policymakers must also deal with uncertainties brought about by the Middle East conflict. This week, the US and Iran announced an interim agreement to reopen the Strait of Hormuz, providing some clarity to the market, but concerns remain about whether oil transport can resume smoothly. Any signs of easing geopolitical tensions could help Japanese policymakers to more clearly assess when to hike rates again to control inflation. Insiders revealed earlier this month that officials believe there may be further rate hikes later this year. However, Prime Minister Sanae Takaichi's preference for loose monetary policy is seen as a potential obstacle. Rinto Maruyama, Senior Foreign Exchange and Interest Rate Strategist at SMBC Nikko Securities, said, "Asada's dissenting vote on the rate hike reinforces the market's impression that the members appointed by Takaichi are indeed dovish. The ongoing concerns about the Bank of Japan falling behind the curve are likely the driving force behind the rise in interest rates and the depreciation of the yen."