Bank of Japan Holds Rates Steady as Inflation Rises, Crypto Markets React Positively

TLDR:

• Bank of Japan kept interest rates unchanged at 0.25%
• Japan’s core inflation rose to 2.8% in August
• BOJ plans future rate hikes if inflation stays on track
• Bitcoin and altcoins rallied after the BOJ decision
• US Federal Reserve cut rates by 50 basis points earlier this week

The Bank of Japan (BOJ) decided to keep its benchmark interest rate unchanged at 0.25% following a two-day policy meeting that concluded on Friday.

This decision comes as Japan’s core inflation rate, which excludes fresh food prices, climbed to 2.8% year-on-year in August, marking the fourth consecutive month of increase.

The BOJ’s cautious stance aims to balance economic recovery with inflation control. In its official statement, the central bank noted that Japan’s economy has been recovering moderately, though “some weakness has been seen in part.”

The bank expects the economy to continue growing at “a pace above its potential growth rate” as the cycle from income to spending gradually intensifies.

Despite holding rates steady for now, BOJ Governor Kazuo Ueda indicated that the central bank may raise interest rates in the coming months if inflation remains on track to hit its 2% target.

This potential for future rate hikes sets the BOJ apart from other major central banks, such as the US Federal Reserve, which recently cut interest rates by 50 basis points.

The decision to maintain current rates was widely expected by economists, who largely anticipate another rate hike by the end of the year. The BOJ’s careful approach comes after ending its negative interest rate policy in March and raising rates to 0.25% in July, marking a shift away from its decade-long stimulus program.

In response to the BOJ’s decision, financial markets showed mixed reactions. The Nikkei 225 index surged by 2.10%, while yields on 10-year Japanese government bonds dipped slightly. The yen remained relatively stable against the dollar.

The cryptocurrency market also reacted positively to the news. Bitcoin’s price increased by about 3%, approaching the $64,000 mark. Other cryptocurrencies, led by Ethereum, saw gains ranging from 4% to 10%. Analysts suggest that the BOJ’s steady rates, combined with the recent Fed rate cut, have created a favorable environment for risk-on assets like cryptocurrencies.

However, some experts warn that the BOJ’s potential future rate hikes could pose challenges for Japan’s economy. Stefan Angrick, associate director at Moody’s Analytics, told CNBC that

“At best, rate hikes will be an added drag on growth. At worst, they could precipitate a broader downturn.”

The BOJ’s decision comes against the backdrop of Japan’s revised second-quarter GDP growth, which was adjusted down to an annualized 2.9% from the previous quarter.

This figure was lower than the government’s initial estimate and missed the 3.2% growth forecast in a Reuters poll.