BoJ Holds Steady but Signals Hawkish Tilt, Reviving Memories of Japan’s August 2024 Market Shock

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All eyes in the U.S. were on the Federal Reserve this week, but it was the Bank of Japan that may have quietly set the stage for renewed market anxiety. On Thursday, the BoJ held rates steady at 0.5% but raised its inflation outlook, a move that investors interpret as signaling further tightening could be on the horizon. Coming just days before the anniversary of last August’s historic sell‑off, the decision is drawing renewed scrutiny of Japan’s policy path and its potential to jolt global markets.

Governor Kazuo Ueda emphasized that uncertainty around tariffs has eased following a U.S.–Japan trade deal announced last week. The agreement set 15% tariffs on Japanese exports—including cars—while securing a pledge of $350 billion in U.S. investment commitments. Ueda described the deal as “a big step forward,” noting it reduced some external risks that had been clouding the central bank’s outlook. The BoJ’s quarterly forecast now projects core inflation at 2.7% for the fiscal year ending March 2026, up from 2.2%. The bank also slightly increased its projections for subsequent years, keeping the inflation profile comfortably near its 2% target.

That outlook matters because it suggests the BoJ may finally resume its slow pivot away from decades of ultra‑easy policy. Economists at

Market reaction was quick but measured. The yen initially strengthened to 148.60 against the dollar after the announcement, before slipping back to ¥149.65 in evening trading. More importantly, the currency has now climbed above 150, which in this case signals weakness because the yen is quoted inversely to the dollar. It’s the first time the yen has traded below its 200‑day moving average since February—a technical marker traders will watch closely. Japanese government bond yields edged up but later eased, while the Nikkei ended the session steady.

The timing of the decision is notable because it comes almost exactly a year after the August 2024 shock, when Japan’s markets experienced one of the most violent single‑day sell‑offs in modern history. On August 5, the Nikkei 225 collapsed 12.4%, its steepest one‑day fall since 1987’s Black Monday. The move was sparked by a surprise BoJ rate hike days earlier that upended the global yen carry trade. Investors had long borrowed cheaply in yen to invest in higher‑yielding assets abroad, but when the yen spiked and Japanese yields rose, the trades unraveled in a disorderly rush to unwind positions.

The fallout was global. South Korea’s Kospi plunged nearly 9%, Taiwan’s Taiex fell over 8%, and Australia’s ASX 200 shed almost 4%. Japan’s own volatility index soared to crisis‑era levels, and while the Nikkei rebounded nearly 10% the following day, the episode left scars. Analysts likened the behavior of the world’s third‑largest stock market to that of a penny stock—capable of massive swings off relatively small catalysts. The Bank for International Settlements later warned that the carry‑trade unwind had exposed dangerous levels of hidden leverage in the system.

That history is why Thursday’s BoJ decision matters beyond Tokyo. A year on, the risk of another destabilizing carry‑trade shock looms large in investors’ minds. This time, however, the backdrop looks different. The Federal Reserve struck a slightly more hawkish tone in its own meeting on Wednesday, reducing market expectations for a September rate cut. That shift means U.S.‑Japan interest rate differentials are less likely to compress abruptly if the BoJ does tighten again, mitigating some of the risk of another violent carry‑trade unwind.

Still, the stakes remain high. The yen’s recent slide beyond 150 suggests that markets are already testing the BoJ’s tolerance. Japan’s policymakers are keenly aware that currency weakness stokes domestic inflation through higher import prices, while sharp moves risk unsettling global capital flows. Ueda acknowledged lingering uncertainty about tariffs and the durability of growth, noting that “it is not as if the fog will all clear at once.” Political instability after the ruling coalition’s Upper House losses only adds another layer of unpredictability.

For global investors, the message is clear: don’t ignore Tokyo. The BoJ’s policy path carries consequences far beyond Japan’s borders, especially given the lessons of last August. Whether the next move comes in October, December, or later, traders will be bracing for potential turbulence in both currency and equity markets. With the Fed and BoJ now in a delicate dance, the balance of global liquidity—and the stability of one of the world’s most popular funding trades—hangs in the balance.