Bank of Japan Interest Rate: On Friday, the Bank of Japan (BOJ) took a significant step by raising its short-term policy rate from 0.25% to 0.5%, the highest rate in 17 years. This is the first rate hike since July 2024, indicating the BOJ’s confidence in the country’s economy and inflation levels. With wage growth and a strong economic outlook, the BOJ believes Japan is on the right track to maintain its 2% inflation target. Notably, Japan’s core inflation rose to a 16-month high of 3% in December.
Why did the Bank of Japan raise rates?
The BOJ’s decision was taken due to wage growth and rising inflation pressures. The central bank highlighted that many Japanese companies plan to continue raising wages, which in turn will boost domestic consumption and keep inflation on target. The BOJ’s optimistic outlook includes a 2.4% inflation forecast for fiscal 2025, up from an earlier forecast of 1.9%.
Apart from wage hikes, labour shortages, rising prices of everyday food items such as rice and a weakening yen have also played a role in pushing up inflation.
Economic growth outlook
While raising rates, the BOJ maintained its growth forecast for Japan, projecting 1.1% economic growth in 2025 and 1% in 2026. However, policymakers are keeping a close eye on global financial stability, especially in light of recent US policy changes.
The yen edged higher, rising 0.5% to 155.32 per dollar, while the two-year Japanese government bond (JGB) yield rose to 0.705%, its highest level since October 2008.
What’s next for Japan’s interest rates?
The BOJ has indicated that if inflation and wage growth continue to rise, further rate hikes are likely. Analysts such as Matt Simpson of City Index predict that the BOJ could raise rates by 25 basis points by the end of 2025, taking the rate to 0.75%.