The Bank of Japan Raises Interest Rates
The Bank of Japan (BOJ) raised interest rates on Friday, marking its first rate hike since July 2022. This decision underscores the central bank's confidence that rising wages will keep inflation stable around its 2% target.
The BOJ raised its short-term policy rate from 0.25% to 0.5%, a level Japan has not seen in 17 years. This move was made in an 8 to 1 vote, with board member Toyoaki Nakamura dissenting.
The central bank's decision is based on its belief that the likelihood of achieving its 2% inflation target is increasing. Many firms have indicated that they will continue to raise wages steadily in this year's annual wage negotiations. Additionally, underlying inflation is heightening towards the BOJ's target, and financial markets remain stable.
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. However, it removed a phrase stressing the need to scrutinize risks surrounding overseas economies and markets.
Attention now shifts to any clues from BOJ Governor Kazuo Ueda in his post-meeting briefing on the pace and timing of further increases.
In a quarterly outlook report, the board raised its price forecasts to project core inflation moving at or above its 2% target for three straight years. It also said risks to the inflation outlook were skewed to the upside amid intensifying labor shortages, rising prices of rice, and the boost to import costs from a weak yen.
The board now projects core consumer inflation to hit 2.4% in fiscal 2025 before slowing to 2.0% in 2026. It made no change to its forecasts that Japan's economy will grow 1.1% in fiscal 2025 and 1.0% in 2026.
While the US economy has been solid and financial markets stable as a whole, the BOJ must be vigilant to uncertainties surrounding US policy conduct.
Japan's core consumer inflation accelerated to 3.0% in December, the fastest annual pace in 16 months. This data suggests that 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 program in March 2024 and pushed up short-term interest rates to 0.25% in July 2024.
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.