BOJ Raises Interest Rates to Highest Level Since 2008, Signaling Confidence in Economic Stability
TOKYO, Jan 24 (Reuters) – The Bank of Japan (BOJ) raised interest rates on Friday to their highest level since the 2008 global financial crisis, reflecting its confidence that rising wages will sustain inflation near its 2% target.
This marks the BOJ's first rate hike since July last year and comes just days after the inauguration of U.S. President Donald Trump, whose policy shifts, including potential higher tariffs, keep global markets on alert.
Concluding its two-day policy meeting, the BOJ increased its short-term policy rate from 0.25% to 0.5%—a level Japan hasn’t experienced in 17 years. The decision was passed by an 8-1 vote, with board member Toyoaki Nakamura dissenting.
The widely anticipated move underscores the central bank's determination to gradually raise interest rates toward 1%, a level analysts consider balanced for economic stability.
"The likelihood of achieving the BOJ's outlook has been rising," the bank said in a statement, citing strong indications from firms planning steady wage increases in this year's annual negotiations. The BOJ also highlighted a rise in underlying inflation toward its 2% target, noting that financial markets remain stable overall.
While the BOJ left its forward guidance unchanged, affirming its intent to continue rate increases if economic and price conditions align with forecasts, it removed language emphasizing the need to monitor risks from overseas economies and markets.
"Their rationale remains consistent. They are still far from a neutral rate, so this adjustment is logical," said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo. "Unless the BOJ changes its framework for rate hikes or raises the neutral rate—currently around 1%—there's limited room for markets to anticipate further hikes."
Following the announcement, the yen strengthened by 0.5% to 155.32 per dollar, while the two-year Japanese government bond (JGB) yield climbed to 0.705%, its highest level since October 2008.
Market focus now shifts to BOJ Governor Kazuo Ueda's post-meeting briefing at 0630 GMT, where insights on the timing and pace of future rate hikes are expected.
BOJ Raises Inflation Forecasts, Signals Confidence in Sustained Economic Growth
In its quarterly outlook report, the Bank of Japan (BOJ) revised its inflation projections, anticipating core inflation to remain at or above its 2% target for three consecutive years. The report highlighted upward risks to inflation, driven by intensifying labor shortages, rising rice prices, and higher import costs fueled by a weak yen.
“With regards to this year’s annual wage negotiations, many firms have expressed plans to continue steadily increasing wages,” the report stated.
Rikio Kozu, head of Japan’s largest union federation, told Reuters on Friday that wage hikes must surpass last year’s 5.1% increase to address declining real wages.
The BOJ now forecasts core consumer inflation to reach 2.4% in fiscal 2025 before easing to 2.0% in 2026. This is an upgrade from its previous October projection, which estimated inflation at 1.9% for both years. The central bank maintained its economic growth forecasts, predicting Japan’s GDP to expand by 1.1% in fiscal 2025 and 1.0% in 2026.
While acknowledging the resilience of the U.S. economy and overall market stability, the BOJ emphasized the need to remain vigilant regarding uncertainties surrounding U.S. policy developments.
“The hike may have been anticipated, but for the first time in a while, there were no major downgrades to their economic outlook,” said Matt Simpson, senior market analyst at City Index in Brisbane. “This leaves room for another 25 basis point hike by year-end, bringing rates to 0.75%.”
Recent data revealed Japan’s core consumer inflation accelerated to 3.0% in December, the fastest annual pace in 16 months, reflecting the ongoing impact of rising fuel and food prices on household living costs.
Since assuming leadership in April 2023, BOJ Governor Kazuo Ueda has dismantled his predecessor’s ultra-loose monetary policies, raising short-term interest rates to 0.25% in July after an initial adjustment in March. BOJ policymakers have reiterated their commitment to further rate hikes if Japan continues to progress toward a sustainable cycle of rising inflation, wage growth, and consumption, enabling businesses to pass on higher costs effectively.
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