Investors react to BOJ's decision to hold rates

July 31 : The Bank of Japan kept its interest rates steady on Friday, while reiterating its willingness to raise borrowing costs further if inflation risks increase.

At the end of its two-day policy meeting, the central bank voted 8-1 to keep its short-term policy rate at 1 per cent. Board member Hajime Takata dissented, arguing for a 25-basis-point increase to 1.25 per cent.

COMMENTS

MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO:

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"I got the impression that the statement was somewhat hawkish. In particular, the section on prices and the 2 per cent inflation target stood out.

"The wording suggested that inflation is 'approaching 2 per cent', and it also emphasized the importance of confirming whether inflation will become firmly anchored at 2 per cent. Given that inflation appears to be getting closer to that 2 per cent level, I think this represents a step forward.

"Since interest rates are already at historically high levels, I think there is still a need to wait and assess conditions for a certain period. However, based on today's outcome, my impression is that the likelihood of an October hike has increased relative to December."

HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:

"The decision to keep rates unchanged was in line with expectations, given that the BOJ had only just raised rates in June. However, board member Takata's dissent in favour of another consecutive rate hike was somewhat unexpected.

"The BOJ generally revised up its economic growth outlook, while lowering its near-term inflation forecasts. These revisions are unlikely to undermine the expected path of future rate hikes.

"The BOJ is expected to continue raising rates at a gradual pace. However, with volatility in USD/JPY increasing, we think that we are entering a phase in which further yen depreciation could prompt markets to price in an earlier rate hike."