Bank of Japan holds rates at 0.25%, yen weakens to one month low

The Bank of Japan on Thursday held its benchmark interest rate steady at 0.25%, opting to take the time to assess the impact of financial and foreign exchange markets on Japan’s economic activity and prices.

The yen weakened 0.3% against the dollar after the rate decision, trading at 155.42 and hitting a one-month low. Meanwhile, the country’s stock indexes pared gains, with the benchmark Nikkei 225 down 0.74% compared to the 0.96% loss before the announcement.

The decision to hold rates surprised economists polled by Reuters, who had expected a 25 basis points hike. Stateside, the U.S. Federal Reserve on Wednesday cut rates by 25 basis points, bringing the federal funds rate to 4.25%-4.5%.

The BOJ said in its statement that the decision to hold was a split 8-1 decision, with board member Naoki Tamura advocating for a 25-basis-point hike.

The central bank did note, however, that there “remain high uncertainties surrounding Japan’s economic activity and prices.”

“In particular, with firms’ behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices,” the bank added.

The BOJ’s decision was in line with a CNBC poll, which showed that 13 out of 24 economists expected the BOJ to keep its key interest rate unchanged in December before raising the rate at the next meeting in January.

The survey was conducted between Dec. 9-13, before the Fed signaled that there would be fewer rate cuts in 2025.

Recent economic data from Japan is still currently supporting the case for a rate hike. Headline Inflation in October came in at 2.3%, the 30th straight month that inflation has crossed the BOJ’s 2% target. November’s inflation data will come in on Friday.

Business sentiment among large companies in Japan also came in higher than expected in the latest BOJ Tankan survey, with the index for large manufacturing firms climbed to 14 in the quarter ended December, up from 13 in the September quarter and beating the 12 expected from economists polled by Reuters.

The index tracks business sentiment in the country among large companies and contributes to the BOJ’s considerations when forming monetary policy. A higher figure means that optimists outnumber pessimists, and vice versa.

In a Dec. 13 note, analysts from Bank of America said that the December Tankan survey indicates Japan’s economy remains resilient.

They added that “this also confirms that the economy and inflation are trending in line with the BoJ’s base case scenario (which is its prerequisite for raising interest rates).”

However, this does not mean that the need for a rate hike is urgent. The analysts said that imported inflationary pressure is receding, while companies’ medium-term inflation expectations remain stable despite the imminent start of President-elect Donald Trump’s administration and the risk of trade tariffs.