TOKYO: The Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis, underscoring its confidence that rising wages will keep inflation stably around its 2% target.
The decision marks its first rate hike since July last year and comes days after the inauguration of U.S. President Donald Trump, who is likely to keep policymakers vigilant ahead of potential repercussions from threatened higher tariffs.
At its two-day meeting concluding on Friday, the BOJ raised its short-term policy rate from 0.25% to 0.5% - a level Japan has not seen in 17 years. It was made in a 8-1 vote with board member Toyoaki Nakamura dissenting.
The move underscores the central bank's resolve to steadily push up interest rates to around 1% - a level analysts see as neither cooling nor overheating Japan's economy.
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“The likelihood of achieving the BOJ's outlook has been rising,“ with many firms saying they will continue to raise wages steadily in this year’s annual wage negotiations, the central bank said in a statement announcing the decision.
“Underlying inflation is heightening towards the BOJ's 2% target,“ the central bank said, adding that financial markets remain stable as a whole.
The BOJ made no change to its guidance on future policy, saying that it will continue to raise interest rates if its economic and price forecasts are realized.
“Their logic remains the same. They are still far away from neutral, so it’s natural to make an adjustment. It’s not necessarily a tightening, rather a lesser easing, in a sense,“ said Naka Matsuzawa, chief macro strategist at Nomura Securities.
“Unless the BOJ either changes the logic of rate hikes, or even raises the neutral point, which they have been mulling - about 1% - there’s not going to much room for the market to price in further hikes in the future.”
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The dollar fell 0.35% against the yen at 155.51 after the decision, while the two-year Japanese government bond (JGB) yield rose to 0.705%, the highest since October 2008.
Attention now shifts to any clues from BOJ Governor Kazuo Ueda in his post-meeting briefing at 0630 GMT on the pace and timing of further increases.
In a quarterly outlook report, the board raised its price forecasts on growing prospects that broadening wage gains will keep Japan on track to sustainably hit the central bank's inflation target.
The board now projects core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to hit 1.9% in both fiscal 2025 and 2026.
It made no change to its forecasts that Japan's economy will grow 1.1% in fiscal 2025 and 1.0% in 2026.
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Japan's core consumer inflation accelerated to the fastest annual pace in 16 months in December, data showed on Friday, in a sign rising fuel and food prices continue to push up living costs for households.
After taking the helm in April 2023, Ueda dismantled his predecessor's radical stimulus programme in March last year, and pushed up short-term interest rates to 0.25% in July.
BOJ policymakers have repeatedly said the central bank will keep raising rates, if Japan makes progress in achieving a cycle in which rising inflation boosts wages and lifts consumption - thereby allowing firms to continue passing on higher costs.
