TOKYO — The Bank of Japan has decided to increase its main interest rate from 0.25% to approximately 0.5%, declaring that inflation is currently aligning with its target goals.
Following a two-day meeting of the policy board, BOJ Governor Kazuo Ueda informed the media that the economy is in a phase of gradual recovery.
He also remarked on the existing uncertainties that persist, including concerns about international inflation and fluctuations in foreign exchange rates. Nonetheless, he reiterated that further rate hikes may be necessary if the economic environment stays stable.
“Our fundamental approach remains unchanged,” Ueda stated, emphasizing the significance of promoting a beneficial cycle characterized by increasing prices and wages.
Recent statistics indicate that inflation is maintaining levels consistent with the central bank’s 2% target. Just hours before the announcement, government data revealed that consumer prices, excluding volatile food items, had increased by an average of 2.5% over the past year, marking the third consecutive year of price growth.
Specifically, the consumer price index, excluding food, demonstrated a 3% rise in December alone. Concerns about long-term wage growth also surfaced, with new information indicating that Japanese workers are experiencing improved earnings, and substantial pay increases are anticipated in the forthcoming annual union negotiations.
The labor ministry modified its wage figures for November, indicating a rise of 0.5% rather than a decline, which bolstered the Bank of Japan’s justification for this interest rate increase.
Immediately following the rate hike announcement, share prices dipped; however, the benchmark Nikkei 225 index recovered swiftly and concluded the day with minimal changes.
The value of the U.S. dollar dropped to 155.41 yen, down from approximately 156 yen earlier in the day.
A prior increase in rates last July had caused a significant slump in stock prices, and the bank is closely monitoring market responses to policies under President Donald Trump.
Ueda mentioned that the market’s reaction to the recent rate increase was relatively subdued, suggesting that this decision was in alignment with economic conditions.
The Bank of Japan initiated its first rate increase in 17 years in March of the previous year, thereby concluding its negative interest rate policy, which had effectively meant negative borrowing rates.
This long-standing overly accommodative monetary policy was aimed at steering the economy away from deflationary pressures and fostering growth. Deflation tends to hinder growth by leading companies to invest less, reduce wages, and prompt consumers to curtail their spending.
Contrasting with the easing measures being implemented by the U.S. Federal Reserve and the European Central Bank, which are cutting rates after previously raising them to tackle inflation, Japan’s approach is notably different. Recently, the Federal Reserve has signaled its intention to moderate the speed of rate cuts.
Dilin Wu, a research strategist at Pepperstone, pointed out that labor shortages stemming from Japan’s stringent immigration policies and market expectations for a 5% wage hike in 2025 contributed to the decision to raise interest rates.
“Moreover, the lack of immediate and aggressive trade protectionist actions from President Trump following his inauguration allowed yen assets to remain stable, thus creating a conducive environment for tightening monetary policy,” Wu stated.
