BOJ Hikes to 31-Year High, Yen Slips Below 150

The Bank of Japan raised interest rates to a 31-year high on Tuesday, pushing the yen below 150 against the dollar for the first time in weeks. Deputy Governor Shinichi Uchida told a news conference the central bank would keep tightening policy if the Iran war kept energy costs lifting inflation above its 2% target.

The policy rate now stands at its highest since 1994, the year after Japan's asset bubble burst. Uchida said the BOJ's latest projections show inflation staying above the target through next year. The Iran war has driven oil above $100 a barrel, pushing Japan's import costs sharply higher.

The yen fell below 150 in Asian trading after the decision. The 10-year Japanese government bond yield touched 1.5%. The Nikkei 225 dropped 1.2%, weighed by the stronger currency that squeezes exporter earnings. The move was orderly, several traders said. Some hedge funds that had built large short positions against the yen were caught offside and added to the move, they said.

The rate hike follows a normalisation cycle that began last year after nearly a decade of rates at or below zero. Tuesday's increase is the biggest single move in the cycle. Uchida did not signal the pace of future hikes. He said the BOJ would adjust policy based on incoming data. Markets are pricing in another rate increase by October, according to overnight index swaps.

The BOJ's tightening rippled through Asian FX markets. The Korean won and the Australian dollar both lost ground against the yen.

The question now is whether the BOJ can sustain this cycle without slowing growth. Japan's economy has grown at a modest clip. A stronger yen could hurt export earnings. Uchida argued the cost of inaction on inflation was higher. The central bank's credibility was at stake after years of missing its price target, he said.

The next scheduled data point is the May national CPI print due later this month. That will show whether the energy shock is still feeding through to consumer prices.