The Bank of Japan (BOJ) raised interest rates on Friday to their highest level since the 2008 financial crisis, signalling confidence that higher wages will sustain inflation near its 2% target and revising its inflation forecasts upward.
The decision marks the Bank of Japan’s first rate hike since July last year and comes days after the inauguration of U.S. President Donald Trump, who is likely to keep global policymakers vigilant ahead of potential repercussions from threatened higher tariffs.
BOJ Signals Further Hikes
BOJ Governor Kazuo Ueda said the central bank will keep raising interest rates as wage and price increases broaden, adding that there was scope to push up borrowing costs further before they reach levels deemed neutral to the economy.
But he offered few clues on the timing and pace of future rate hikes, saying the decision will be based on how soon Japan will see trend inflation sustainably hit the BOJ’s target.
“We don’t have any preset idea. We’ll make a decision at each policy meeting by looking at economic and price developments as well as risks,” he told a press conference after the policy decision.
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 an 8-1 vote with board member Toyoaki Nakamura dissenting.
The widely expected move marks another step Japan is taking away from the deflation and stagnant economic growth that dogged the country for decades.
“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.
Guidance On Future Policy Unchanged
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.
But it removed a phrase stressing the need to scrutinise risks surrounding overseas economies and markets, underscoring its conviction that solid U.S. growth will underpin Japan’s economy – at least for now.
“Various data shows the U.S. economy is in firm shape. Markets have been stable as the broad direction of Trump’s policies become clearer,” Ueda said.
The BOJ’s path is bound with uncertainty, however, with trade uncertainties and Trump calling for further rate cuts by the U.S. Federal Reserve and similar action from central banks around the world.
“There’s very high uncertainty” on the scale of Trump’s expected tariff hikes, Ueda said. “Once there is more clarity, we will take that into our forecasts and reflect them in deciding policy.”
Japanese Yen Jumps
The yen rose as much as 0.8% to 154.845 per dollar following the policy decision, but pared gains after Ueda’s news conference. The two-year JGB yield briefly rose to 0.725%, a level last seen in October 2008.
Markets were pricing in one more 25-basis-point rate hike by the end of this year, unchanged from before Ueda’s comments.
“Their logic remains the same. They are still far away from neutral, so it’s natural to make an adjustment,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
“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.”
(With inputs from Reuters)
