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 stable around its 2% target.
The decision marks its first rate hike since July last year and comes days after the inauguration of US President Donald Trump, who is likely to keep global 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 to 1 vote with board member Toyoaki Nakamura dissenting.
The widely expected 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.
“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. But it removed a phrase stressing the need to scrutinize risks surrounding overseas economies and markets.
“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.”
The yen rose around 0.5% to 155.32 per dollar 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.
Inflation risks
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.