TOKYO--The yen swung sharply as investors assessed Japan's monetary-policy path after the central bank raised its benchmark interest rate to the highest level since 1995.
The Japanese currency weakened to a two-week low against the dollar shortly after the decision, as two dissenting votes raised doubts about further policy adjustments.
In a widely anticipated move, the central bank accelerated the pace of tightening in its current cycle, raising the policy rate to 1.25% from 1.0% amid mounting concerns over price pressures from the Middle East energy shock, exacerbated by yen weakness.
The currency then recovered some ground after Gov. Kazuo Ueda pointed to a change in the central bank's strategy at his press briefing.
"The policy shift reflects a transition as Japan's underlying inflation approaches 2% after hovering below that mark, with the goal of monetary policy now being to anchor inflation around 2%," he said.
Ueda pledged to seek further hikes at a proper speed, warning that underlying inflation could overshoot the bank's 2% target and stressing the need to closely monitor upside risks.
"The biggest determinant of currency credibility is whether the central bank keeps inflation at an appropriate level or has a firm strategy to restore it after temporary deviations," he said.
While the BOJ governor isn't ruling out any options, including larger rate increases or a faster tempo, he didn't give clear hints on when the bank will act next.
The yen fell back toward the end of the news conference and was last trading around 157.70 per dollar.
The BOJ paused after its last rate increase in June, but hawkish comments from central-bank officials--along with supportive remarks from U.S. Treasury Secretary Scott Bessent--led markets to almost fully price in Friday's move.
The Federal Reserve's decision to also raise rates earlier this week added to the conviction that the BOJ will need to continue tightening to keep the Japan-U.S. rate differential as yen-friendly as possible.
However, the two dissenting board members, Toichiro Asada and Ayano Sato--both appointed by Prime Minister Sanae Takaichi--pointed to a lack of strength in prices and economic conditions. BOJ watchers say the opposing votes from the two Takaichi appointees could signal that the premier doesn't favor monetary tightening.
Consumer price data released Friday showed that the measure excluding volatile fresh food and energy prices rose 1.9% in August from a year earlier, slightly below the BOJ's 2% target. But economists expect price growth to accelerate in the coming months as the effects of rising oil costs emerge with a lag and food inflation persists.
Economists say it isn't a matter of whether the BOJ will keep raising interest rates, but how quickly and by how much.
"The BOJ is expected to raise interest rates at a faster pace than previously toward a neutral level for the economy" to unwind easy monetary conditions that continue to fuel inflation, even after its latest rate increase, said Yusuke Matsuo, an economist at Mizuho Securities.
Ueda said Friday that the bank should bring its policy rate closer to a neutral level--one that is neither stimulative nor restrictive to the economy. At 1.25%, the benchmark rate still sits near the bottom of the BOJ's estimated neutral range of 1.1% to 2.5%.
Matsuo projects the BOJ's next hike to come in December or January, after it examines the impact of its previous action across the country through its network, including at branch managers' meetings.
Capital Economics' Marcel Thieliant expects the BOJ to lift its policy rate to 2% as soon as mid-2027.
"Given that the bank believes that accommodative financial conditions are expected to be maintained after the change in the policy interest rate, that suggests that further tightening is forthcoming," the economist said.