The Bank of Japan (BOJ) has raised interest rates by 25 basis points, as expected, to around 0.5%, marking its third rate hike since it began scaling back its ultra-loose monetary policy in early-2024. The BOJ forecasts that inflation will remain underpinned and around its annual target in the coming years, with CPI expected to average around 2.6% to 2.8% in fiscal 2024 and 2.2% to 2.6% in 2025, slightly above prior expectations.
The central bank also trimmed its gross domestic product (GDP) forecasts for fiscal 2024 and 2025, but raised its inflation forecasts. The BOJ’s tightening cycle is driven by expectations of a virtuous cycle of higher wages and increasing private consumption, with recent data showing both trends remaining in place.
The BOJ signaled that if its economic and price outlooks are met in the coming months, it will continue to raise interest rates and adjust the degree of monetary accommodation. However, analysts only expect the BOJ to next raise rates by July, after the conclusion of Japan’s upper house elections, which will offer more political clarity. Policymakers are also on edge over US President Donald Trump’s plans for increased trade tariffs, which could impact Japanese exporters and dent the yen.
