The Bank of Japan (BOJ) raised its interest rates to their highest since the 2008 global financial crisis, underscoring its confidence that rising wages will keep inflation stable around its 2% target. The decision, made despite uncertainty surrounding the global economy under the new U.S. administration, marks the BOJ’s first rate hike since July last year.
The BOJ raised its short-term policy rate from 0.25% to 0.5%, a level not seen in 17 years, in an 8-1 vote with board member Toyoaki Nakamura dissenting. The move is expected to increase borrowing costs for consumers and businesses, which may curb economic growth, but the BOJ believes that the benefits of higher interest rates will outweigh the costs.
The BOJ also revised up its inflation forecasts, projecting core inflation to move at or above its 2% target for three straight years. The central bank’s governor, Kazuo Ueda, emphasized that the weak yen continues to put upward pressure on import prices, while wage hikes are becoming more embedded and broad-based among companies.
The BOJ removed a phrase stressing the need to scrutinize risks surrounding overseas economies and markets, underscoring its conviction that solid U.S. growth will underpin Japan’s economy, at least for now. The bank’s decision is bound with uncertainty, however, with trade tensions and U.S. President Donald Trump’s potential policies creating uncertainty.
Market reaction was mixed, with the yen rising 0.5% to 155.32 per dollar, while the two-year Japanese government bond yield rose to 0.705%, the highest since October 2008. The BOJ’s path is likely to be watched closely, as other central banks, including the U.S. Federal Reserve, may follow suit.
The BOJ’s move is seen as part of its efforts to push up interest rates to around 1%, a level that is neither cooling nor overheating the economy. The central bank’s next move will depend on its assessment of the economy and prices, with no clear indication of when the next rate hike will occur.
