Nikkei Near Record Highs as Bank of Japan Signals More Rate Hikes

Japan's benchmark Nikkei 225 has been trading near record highs, buoyed by strength in technology shares and resilient corporate earnings, even as the Bank of Japan signals that its tightening cycle is far from over. After raising its policy rate to 1% in June, the highest level in three decades, board members have argued that rates should continue moving gradually toward a neutral setting of around 2%, with hikes of a quarter point at intervals of a few months. Officials have warned that inflationary pressures are likely to strengthen as firms pass higher import and energy costs on to consumers, and that the central bank should be prepared to accelerate the pace of increases if price risks intensify. At the same time, the yen has remained under pressure, with some analysts revising their forecasts to imply further weakness against the US dollar, reflecting expectations that Japanese rates will still sit well below those in the United States. The combination of record equity prices, a firming inflation outlook and a soft currency captures the delicate balance facing policymakers as they normalize policy after years of ultra-loose settings.