Japan’s central bank decided to raise its policy interest rate from the current 0.25% to 0.5% in the monetary policy meeting on Friday, marking the first rate hike in six months for the Bank of Japan. This increase will bring the interest rate to its highest level in nearly 17 years since October 2008.
This decision highlights the Bank of Japan’s confidence that raising corporate wages will stabilize inflation rates around the 2% target.
During the two-day meeting, the Bank of Japan raised the “unsecured overnight call rate” from the current 0.25% to 0.5%, a rate unseen in Japan for 17 years. With a vote of 8-1 in favor, the decision was approved at the meeting.
This move, as expected by observers, demonstrates the Bank of Japan’s commitment to gradually raising interest rates to around 1%. Many analysts believe that this level would represent the neutral interest rate for the Japanese economy, neither overheating it nor causing it to cool down.
Bank of Japan Governor Haruhiko Kuroda previously stated that when determining the next interest rate hike, focus would be placed on the developments of the 2025 spring labor negotiations, known as “Shunto,” as well as the economic policy direction and market reactions following the inauguration of U.S. President Trump.
Regarding the spring labor negotiations in 2025, the Bank of Japan noted through various channels including a meeting of branch managers on January 9 that it had sensed that businesses were preparing for “substantial wage increases.”
Regarding the economic and market conditions following President Trump’s inauguration, the Bank of Japan assessed that the markets did not experience significant volatility and remained relatively stable, with many stakeholders believing that “rate hikes can proceed as expected.”
This marks the third rate hike since Japan lifted negative interest rates in March 2024.
The Bank of Japan’s statement did not change its future policy planning, indicating that if the economy and prices develop as expected, the interest rates will continue to rise. However, the Bank of Japan removed the wording emphasizing the need to carefully assess overseas economic and market risks.
Following the announcement of the decision, the yen rose by about 0.5% to 155.32 yen to the dollar. The yield on the two-year Japanese government bonds (JGB) rose to 0.705%, the highest since October 2008.
The Bank of Japan also noted that due to intensifying labor shortages, rising rice prices, and the weak yen leading to increased import costs, the risks for inflation outlook leaned towards the upside.
The Bank of Japan predicts that the core consumer price inflation rate will reach 2.4% in the 2025 fiscal year, then slow down to 2.0% in 2026. In the previous forecast made in October, the committee expected inflation rates of only 1.9% for the 2025 and 2026 fiscal years.
It also forecasts that the Japanese economy will grow by 1.1% in the 2025 fiscal year and 1.0% in the 2026 fiscal year.