The Bank of Japan raised interest rates yesterday to their highest since the 2008 global financial crisis and revised up its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable around its two per cent target.
The decision marks the BOJ’s 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.
BOJ governor Kazuo Ueda said the central bank will keep raising interest rates as wage and price increases broaden, adding that there was scope to push up borrowing costs further before they reach levels deemed neutral to the economy.
But he offered few clues on the timing and pace of future rate hikes, saying the decision will be based on how soon Japan will see trend inflation sustainably hit the BOJ’s target.
“We don’t have any preset idea. We’ll make a decision at each policy meeting by looking at economic and price developments as well as risks,” he told a Press conference after the policy decision.
At its two-day meeting concluding yesterday, the BOJ raised its short-term policy rate from 0.25pc to 0.5pc – a level Japan has not seen in 17 years. It was made in a 8-1 vote with board member Toyoaki Nakamura dissenting.
The widely expected move marks another step Japan is taking away from the deflation and stagnant economic growth that dogged the country for decades.
“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.
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 realised.
But it removed a phrase stressing the need to scrutinise risks surrounding overseas economies and markets, underscoring its conviction that solid US growth will underpin Japan’s economy – at least for now.
“Various data shows the US economy is in firm shape. Markets have been stable as the broad direction of Trump’s policies become clearer,” Ueda said.
The BOJ’s path is bound with uncertainty, however, with trade uncertainties and Trump calling for further rate cuts by the US Federal Reserve and similar action from central banks around the world.
The yen rose as much as 0.8pc to 154.845 per dollar following the policy decision, but pared gains after Ueda’s news conference. The two-year JGB yield briefly rose to 0.725pc, a level last seen in October 2008.
Markets were pricing in one more 25-basis-point rate hike by the end of this year.
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