The Japanese central bank raised interest rates. Strategists analyze: the yen and Japanese bonds continue to be under pressure, while Japanese stocks remain strong.

After the Bank of Japan announced a rate hike on Tuesday, strategists believe that the Japanese yen and Japanese government bonds will continue to be under pressure, while the Japanese stock market will still receive support. Strategists believe that the Bank of Japan may need to take more decisive measures to support the yen and curb inflation. It is reported that the Bank of Japan officially announced a 0.25 percentage point increase in the benchmark interest rate to 1.00%, reaching the highest level since September 1995. The rate decision was passed with a vote of 7 to 1. In addition, the Bank of Japan unexpectedly announced a suspension of the reduction of its bond purchase plan, deciding to maintain the monthly purchase scale of Japanese government bonds at around 2 trillion yen from April 2027. The market focus has shifted to the press conference scheduled for 3:30 p.m. Tokyo time. Since Bank of Japan Governor Kuroda Haruhiko is still hospitalized for a liver cyst infection, Deputy Governor Uchida Shinichi will assume the responsibilities of the Governor at the afternoon press conference. Here are the key points from various major institutional strategists: Tomo Kinoshita, Global Market Strategist at Sumitomo Asset Management Japan: It was surprising that the Bank of Japan not only extended its quantitative tightening policy by a year, but also seemed to imply that the policy would be maintained in the long term. This raises concerns about the long-term supply and demand situation in the Japanese government bond market and may exert sustained upward pressure on long-term yields. I estimate that the latest announcement will reduce the Bank of Japan's holdings of long-term government bonds by approximately 42 trillion yen by 2027. In addition to the Japanese government's issuance of over 30 trillion yen in long-term government bonds within a year, the market will need to digest over 72 trillion yen in long-term bonds. From a supply and demand perspective, this increases the risk of upward pressure on long-term bond yields. Whether the Bank of Japan should continue to reduce its holdings of government bonds at a faster pace than major Western central banks may become a focal point of future debates. Naka Matsuzawa, Chief Strategist at Nomura Securities: We cannot expect Deputy Governor Uchida Shinichi to make too many hawkish comments at the press conference. The foreign exchange market has stronger expectations for a more hawkish stance from the Bank of Japan, so the yen may weaken further after the press conference. Masahiko Loo, Senior Fixed Income Strategist at Daiwa Asset Management: Despite Kuroda Haruhiko's absence, the 7 to 1 vote result highlights the strong momentum of monetary policy normalization, with supporters of reining in inflation clearly in the minority. The focus now turns to Deputy Governor Uchida Shinichi's press conference - hawkish undertones and hints of an early rate hike in September/October will be closely watched, although the likelihood is low. With ongoing inflation driving it, the Bank of Japan is still expected to set the final interest rate around 1.5% by 2027. Rinto Maruyama, Senior FX and Rates Strategist at SMBC Nikko Securities: Starting next month, Sato Ayano, appointed by Prime Minister Takamori Sanae, will join the Bank of Japan's board, replacing Nakagawa Junko, which means that there may be two members opposed to rate hikes at that time. In addition, it is expected that the Bank of Japan will further hike rates in 2027, and the terms of hawkish members Takahashi Hajime and Tamura Naoki will also end. Considering these factors, the Bank of Japan's hiking process may not proceed as expected by the market, and concerns about the Bank of Japan's policy responses being slow to react may likely be the reason for rising bond yields and yen depreciation. Homin Lee, strategist at Lombard Odier: We believe that the new guidance on 2027 Japanese government bond purchases has struck an appropriate balance between quantitative tightening demand and bond market stability, but it is important to confirm any forward guidance that Deputy Governor Uchida may offer at the afternoon press conference. With the mid-term review of the quantitative tightening policy over, market participants will try to interpret the Policy Board's considerations on the final interest rate level and the pace of rate hikes. We believe that the future trend of Japanese assets may be characterized by a rise in the stock market, reflecting a global surge in capital expenditures and the easing of risks in the Hormuz Strait. We currently assume a rate hike every six months, with the next hike likely in December 2026. Given the attractive positioning of the Japanese stock market in the context of the global capital expenditure surge and improvements in corporate governance standards, we view it as the most favored developed market in the portfolio. We believe that as long as Deputy Governor Uchida does not make unexpectedly hawkish comments at the afternoon press conference, the market's positive sentiment will be maintained. Nikos Tzabouras, Senior Financial Strategist at Tradu: The Nikkei Index remained firm after the Bank of Japan raised rates to 1%, as monetary policy remains accommodative, and officials are expected to take a cautious stance, as evidenced by only one dissenting vote against the rate hike. The structural support for the Nikkei Index is very strong, and the rate hike by the central bank cannot shake its upward trend. However, further rate hikes this year may be a drag on the stock market. The pressure of inflation from energy shocks, four consecutive months of real wage growth, and continued weakness of the yen give policymakers strong incentives to further tighten monetary policy. Meanwhile, even if the Strait of Hormuz reopens, it may take several months to return to normal navigation, which will continue to negatively impact the Japanese economy. Increasing government expenditure on top of a record budget may support economic growth, but it may also raise reasonable concerns about public finances and ultimately undermine market confidence in Japanese assets. Takuya Kanda, Senior Forex Analyst at Gaitame.com Research Institute: Market participants generally believe that hiking rates every six months is too slow, and the Bank of Japan needs to accelerate the pace of rate hikes. However, from the Bank of Japan's statement, I do not feel that it hints at any more aggressive rate hike measures. Deputy Governor Uchida Shinichi is usually considered more hawkish than Governor Kuroda Haruhiko. But my impression of him is more dovish, as he stated in August 2024 that the Bank of Japan would not hike rates in unstable financial markets. Furthermore, since he will speak as a proxy for Governor Kuroda, there is a question mark over whether he will make strong comments on further rate hikes. His speech may ultimately not be as hawkish as investors expect. In this case, the yen may weaken further, with the USD/JPY exchange rate potentially breaking through 160.72 and even testing the 161 level. It would not be surprising if intervention measures were taken today. Tim Waterer, Chief Market Analyst at KCM Trade: The Bank of Japan's decision has arrived, and the Nikkei Index remains firm. Traders are pleased to see that this decision did not contain any unexpectedly hawkish content, allowing the bullish trend in Japanese stocks to continue. David Forrester, Senior Strategist in Corporate and Investment Banking at Crdit Agricole CIB Singapore: The decisions on policy rates and Japanese government bond purchases are in line with market expectations, with the committee showing only a slight hawkish bias, mentioning that higher oil prices may lead to core consumer price index (CPI) inflation through inter-enterprise transactions. Overall, the committee maintains a neutral stance, indicating that if the economy continues to perform in line with the base scenario, further rate hikes may be possible in the future. Since market expectations for today's 25 basis point rate hike and further hikes by the end of the year exceed 90%, a hawkish rate hike must be taken today to support the yen. Therefore, as there have been no significant changes in the committee's wording and one member voted to keep the rate unchanged, the yen weakened slightly. In history, if the Bank of Japan's press conference leans dovish, it is often seen as a trigger for foreign exchange interventions. However, Uchida is unlikely to want to create too many foreign exchange fluctuations in place of Kuroda. Alex Loo, Senior Asia Economist at TD Securities: In order to end the downward trend of the yen, the Bank of Japan needs to send clear signals to market participants: either the pace of rate hikes will be faster than every six months, or the final interest rate level will be above 1.50%. With Kuroda's absence at this meeting, the Bank of Japan may have difficulty sending hawkish signals. Charu Chanana, Chief Investment Strategist at Saxo Markets: The Bank of Japan is clearly more concerned about inflation, especially with the core inflation rate above the 2% target, but its actions are still cautious and it continues to state that the financial environment will remain accommodative. In addition, the 7 to 1 vote result also weakens any hawkish signals. Even if the Bank of Japan raises rates, intervention risks remain if the USD/JPY exchange rate remains above 160 - especially with the Federal Reserve set to make a rate decision soon, and a weaker dollar environment could provide Japanese authorities with a better window for action. The conclusion of the US-Iran agreement eliminates a key support factor for the dollar, making it timely to intervene. Intervening may not necessarily change the course of the yen, but it may help close some historically high yen short positions. The market may be initially sensitive as Uchida Shinichi is not well known, but his statements are unlikely to deviate significantly from the unified communication established by Kuroda. Ryutaro Kimura, Senior Bond Strategist at BNP Paribas Asset Management: The decision to stop reducing the amount of Japanese government bond purchases after April 2027 is in line with previous reports, so it is not surprising. On the other hand, the statement that there will be no further mid-term review of the government bond purchase program is a reasonable decision aimed at avoiding speculation by market participants that the quantitative tightening plan may be suspended in the near future. If the committee announces another mid-term review in a year, it indicates that the next action to be discussed will be to stop the Bank of Japan's balance sheet reduction, which may exert downward pressure on the yen.