Why Japan’s markets flipped the usual script after central bank rate hike

Japanese markets reacted in a seemingly counterintuitive fashion on Friday after the country's central bank hiked benchmark interest rates to their highest in 31 years.

Interest-rate increases ordinarily support a country's currency, push up its bond yields, and put pressure on its stock market. Japan's currency, bond yields, and stock market did exactly the opposite.

The yen weakened past 157 against the dollar, the yield on the 10-year Japanese Government Bond slipped, while the Nikkei 225 gained 1.5% as the BOJ raised its policy rate to 1.25%.

The hike brought the policy rate to its highest level since 1995, and came just three months after its previous increase.

Experts pointed to the split decision by the BOJ's board, as the reason for the uncharacteristic market reaction, as it indicated that the bank might not take a too hawkish stance.

"The two dissenting votes in favor of keeping rates unchanged came as a surprise," said Hirofumi Suzuki, chief FX strategist at Japanese bank Sumitomo Mitsui Banking Corporation.

The decision to hike was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting from the verdict.

Asada noted that as the core inflation rate was below 2%, the economic situation might not be strong, and advocated for holding rates steady. Core inflation for August in Japan stood at 1.7%, down from 1.8% in July.