The central bank maintained its benchmark interest rate while for the first time stating that underlying inflation has reached its 2% target—a milestone development that opens the door to a potential rate increase as early as December. The decision was approved by a vote of eight to one.
As a result, the yen strengthened against the dollar, rising by 0.4% at one point to 157.12.
Now, the central bank must shift its strategy from raising rates to ensuring they do not become excessively high. More than 80% of economists expect another rate hike in December.
“Given that market expectations for a December rate hike are already very high, I’d like to see whether the BOJ will reinforce those expectations,” said Junya Takehara, senior economist at Sumitomo Mitsui Banking Corporation. “In the past, Ueda has stated during press conferences that the BOJ would closely assess developments before the next meeting.”
With tech stocks falling and oil prices rising, global markets have turned toward safe-haven assets, boosting the yen. For years, the yen had seen higher-than-expected demand during market stress due to widening yield differentials and substantial inflows from Japan’s overseas investments. Now, the yen appears to be regaining its traditional role as a safe-haven currency.
The achievement of the official inflation target signals further monetary tightening ahead, which should support the yen. However, risks of renewed tensions between the U.S. and Iran following the U.S. midterm elections have pushed up oil prices, potentially limiting the yen’s ability to fully benefit from a weaker dollar amid heightened geopolitical strain.
Goldman Sachs strategists say that as changes in Japan’s policy backdrop reduce the risk of sharp yen depreciation amid rising global yields, the yen is becoming a more effective hedge against market shocks driven by artificial intelligence.
