Bank of Japan raises interest rates to highest level in 17 years #JapanFinance

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The Bank of Japan has raised short-term interest rates to “around 0.5 per cent”, the highest level in 17 years, as the central bank said that economic activity and wage and price inflation were at targets to justify its push to “normalise” monetary policy.

The BoJ’s decision, by an 8-1 vote, raised the policy rate from 0.25 per cent to its highest level since the 2008 global financial crisis. The move followed weeks of speculation over whether governor Kazuo Ueda would wait for stronger evidence of rising Japanese wages and sustainable inflation.

In a statement accompanying the decision on Friday, the BoJ said Japan’s economic activity and price growth were developing in line with the central bank’s outlook. “The likelihood of realising the outlook has been rising,” it said.

The yen, which had been edging higher against the dollar in the weeks preceding the BoJ’s two-day policy meeting, strengthened about 0.6 per cent to ¥155 per dollar. Investors raised bets that Ueda might target an additional rate rise in July as he seeks to entrench a departure from decades of ultra-accommodative policy.

Japanese equities were flat on Friday following the announcement. Japanese 10-year government bond yields rose 0.02 percentage points to 1.22 per cent.

Ueda expressed some caution at a press conference on Friday afternoon, saying the timing and pace of adjusting monetary support would depend on economic and price developments. “We don’t have any preconceived idea. We will make a decision at each policy meeting by examining economic and price developments as well as risks,” he said.

But analysts interpreted the tone of the press conference and the BoJ’s statement as a signal of further rate increases to come this year.

Tomohiro Ota, senior Japan economist at Goldman Sachs, said Friday’s decision paved the way for the BoJ to proceed with 0.25 per cent rate rises roughly every six months, with the next move likely in July, until it reached a policy rate of 1.5 per cent.

Earlier in the day, currency traders had warned that Ueda’s press conference could trigger some market volatility. The BoJ’s previous rate rise in July, which surprised most analysts, triggered a one-day “flash-crash” in Japanese equities and an unwinding of the yen carry trade.

In its statement, the BoJ observed that many companies had expressed intentions to raise salaries in this year’s annual shuntoor spring wage negotiations, between unions and management.

When the BoJ held rates last month, Ueda argued that he required “one more notch” of information to be convinced that wages were rising sustainably.

“We gathered that this is the one ‘notch’,” said Joey Chew, head of Asia forex research at HSBC.

“With firms’ behaviour shifting more towards raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices,” the BoJ said.

Several hours before the BoJ announcement, official data showed Japan’s core consumer prices rose 3 per cent in December from a year earlier. The growth, partly driven by the cutting of government energy subsidies, marked the highest annual pace of inflation in 16 months.

The central bank is targeting a stable inflation rate of about 2 per cent. In its outlook, it forecast consumer price inflation excluding fresh food of about 2.5 per cent for fiscal 2025 and about 2 per cent for fiscal 2026. Both figures were higher than the outlooks released in October.

The BoJ highlighted elevated rice prices among factors that were likely to underpin inflation.

Additional reporting by William Sandlund in Hong Kong