Asian equities moved higher Friday as lower oil prices provided some relief to markets still dealing with elevated global inflation risks. The Bank of Japan’s latest interest-rate decision added another layer to the market outlook, raising borrowing costs as expected but delivering a less aggressive signal than some investors had anticipated.

Japan’s central bank lifted its policy rate from 1% to 1.25%, taking rates to a 31-year high. However, the decision passed with two board members voting against the increase. The split vote reduced expectations for an accelerated tightening cycle and contributed to a decline in the Japanese currency.

Yen Weakens Despite Another BOJ Rate Increase

The yen fell approximately 0.7% to 157.1 per dollar following the BOJ decision. The currency had rallied strongly earlier in September as investors positioned for faster rate increases and signs emerged that Japanese investors were repatriating funds.

That momentum has weakened as the Federal Reserve adopted a more hawkish stance. Attention now turns to Governor Kazuo Ueda’s guidance as investors assess the timing of the next potential increase. Market participants cited in the source expect another 25-basis-point hike in December, while the possibility of a consecutive increase in October appears less supported.

A weaker yen helped Japan’s Nikkei rise nearly 2%. At the same time, Japanese two-year government bond yields declined four basis points to 1.82%, reflecting reduced expectations for an immediate acceleration in monetary tightening.

Global Central Banks Remain Focused on Inflation

The BOJ’s decision comes after a week of significant monetary-policy developments across major economies. The Federal Reserve raised interest rates by 25 basis points and signaled further increases, while the Bank of England warned that prolonged Middle East tensions could eventually require additional tightening.

The European Central Bank has similarly cautioned about inflation and the possibility of further policy tightening. Australia’s central bank is also assessing whether three rate increases this year will be sufficient to bring inflation back toward its 2%-3% target.

The common concern is the impact of elevated energy prices. A prolonged disruption to oil supplies could keep inflation above central-bank targets and make the path toward lower interest rates more difficult.

Falling Oil Prices Provide Some Relief

Brent crude futures fell as much as 1.5% to $103.29 per barrel as markets considered alternative routes for Middle Eastern oil supplies. Concerns about further strikes involving Saudi Arabia and Yemen’s Houthis remain, but expectations of improved supply availability helped reduce some immediate pressure.

Reports that China had asked Iran to help contain Houthi military activity also contributed to improved sentiment. The potential for reduced disruption is particularly significant while crude prices remain above $100 per barrel.

Treasury Yields Retreat From Seven-Year Highs

U.S. government bonds also stabilized after a sharp selloff earlier in the week pushed the 10-year Treasury yield above 5%, its highest level since 2007. The yield subsequently eased to approximately 4.936%.

The decline has helped improve conditions for risk assets, although yields remain elevated by recent historical standards. European stock futures were meanwhile pointing to a softer opening, with futures down approximately 0.35%.

What Could Investors Watch Next?

The direction of the yen, crude oil and Treasury yields will remain closely connected to expectations for global monetary policy. A less aggressive BOJ could continue weighing on the yen, while sustained oil-price declines could reduce inflation pressure and support equities.

Investors will also focus on Governor Ueda’s guidance and upcoming inflation data for evidence about the timing of the next Japanese rate increase. At the same time, developments in the Middle East could quickly change the energy and inflation outlook if supply disruptions intensify.