The Bank of Japan decided to raise interest rates at its monetary policy meeting on July 31 (Japan time). This is the first rate hike since the March meeting ended the negative interest rate policy.

Accordingly, the Bank of Japan (BOJ) increased its overnight lending rate to 0.25% from the previous range of 0 - 0.1%. This decision was made at the same time as a plan to reduce long-term government bond purchases until the end of fiscal year 2025.

In addition, the BOJ will also reduce its monthly purchases of Japanese government bonds to about 3 trillion yen per month in the first quarter of 2026. This will reduce the amount by about 400 billion yen per quarter.

According to Governor Kazuo Ueda, the current interest rate is extremely low. "An interest rate hike will not have a major negative impact on the economy. As for the target of interest rate policy, we will think about it during the implementation process, considering the impact of this second rate hike," he said.

Hideo Kumano, chief economist at the Dai-ichi Life Economics Research Institute, said the decision confirmed that the BOJ was taking core inflation seriously. He said the BOJ had been cautious about raising interest rates due to concerns about the economy, shifting its stance from being “behind the curve” to “ahead of the curve.”

In response, the US dollar weakened and the yen strengthened in Tokyo on Tuesday, hitting a four-month high. The USD/JPY exchange rate is approaching 150, up more than 4% since the beginning of the year.

On the stock market, export-related stocks fell due to the appreciation of the Yen, including Toyota Motor Corporation. In addition, large stocks such as real estate were also sold off due to the BOJ's interest rate hike. The Nikkei index at one point fell as much as 1,300 points and closed at 38,099.50 points. Mr. Yutaka Miura - senior technical analyst at Mizuho Securities - commented: "The upward trend of the Yen is a negative factor for Japanese stocks."

According to Reuters, in the foreign exchange market, the yen rose in response to the BOJ's rate hike the previous day and comments by Bank of Japan Governor Kazuo Ueda at a press conference later. The US Federal Open Market Committee (FOMC) press conference, following the US interest rate cut with US Federal Reserve Chairman Jerome Powell saying that there was a possibility of discussing a rate cut as early as September, also boosted the yen.