Nikkei 225 Climbs as Bank of Japan Raises Interest Rates

Japan's Nikkei 225 index experienced gains following the Bank of Japan's (BOJ) decision to raise its benchmark short-term interest rate. The index rose by 1.03%, reflecting a positive market reaction to the central bank's monetary policy shift.

The Nikkei 225 closed at 49,507.21, marking a notable increase after the BOJ's announcement. This upward movement was echoed in other Asian markets, with Hong Kong's Hang Seng and Shanghai's Composite Index also posting gains of 0.8% and 0.4%, respectively. The BOJ's move to increase the rate by 25 basis points to 0.75%, the highest level since 1995, signals a move away from its long-standing ultra-loose monetary policy.

The BOJ's policy statement highlighted the expectation that wages and inflation will rise moderately in tandem. The central bank anticipates solid wage hikes in 2026, which are expected to keep the BOJ on track, even if inflation temporarily dips below the 2% target. Governor Ueda indicated that headline prices could fall below 2% in the first half of the year. The central bank has also become more optimistic about economic growth, anticipating a “moderate pace” of expansion, a revision from its previous assessment that growth would likely stagnate due to the effects of U.S. tariffs. Inflation is still expected to hit the 2% target toward the latter part of the 3-year projection period through 2027.

The yen weakened slightly by 0.25% to 155.94 per dollar following the rate hike announcement. Markets are now focused on Governor Ueda's upcoming press conference to gauge the likelihood of further rate increases, especially with real interest rates still considered “significantly” low.

Analysts are closely monitoring the BOJ's future policy decisions, particularly in light of Governor Ueda's emphasis on data-dependent adjustments. The central bank's commitment to closely monitor the neutral rate and recalculate its range when the time comes suggests a cautious but deliberate approach to tightening monetary policy. The BOJ's actions are expected to have a significant impact on the Japanese economy and global financial markets.

The Nikkei 225's positive response to the rate hike suggests that markets view the BOJ's policy shift as a step in the right direction for managing inflation and fostering sustainable economic growth, although the impact of future policy adjustments remains a key point of observation.