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Bank of Japan Hikes Rates to Highest Level Since 2008 to Combat Inflationary Pressures
The Bank of Japan hiked its policy rate by 25 basis points to 0.5%, the highest level since 2008, as it seeks to normalize its monetary policy amid signs of sustained inflation and rising wages. The move came as expected, with an overwhelming majority of economists in a CNBC survey predicting a hike.
The hike was accompanied by a split vote, with board member Toyoaki Nakamura dissenting, citing the need for more data on firms’ earning power before raising rates.
The Japanese yen strengthened 0.6% to 155.12 against the dollar after the decision, while the country’s benchmark Nikkei 225 stock index rose marginally. The yield on the 10-year Japanese government bond climbed 2.5 basis points to 1.23%.
The Bank of Japan has been positioning for the possibility of a “virtuous cycle” where higher salaries fuel growth in prices, enabling it to raise rates. The central bank is closely watching the “shunto” wage negotiations with businesses, with Deputy Governor Ryozo Himino citing the need for “strong wage hikes” in the 2025 fiscal year.
According to the head of the Japanese Trade Union Confederation, annual pay increases this year must exceed 5.1% to prevent real wages from falling, while the Bank of Japan is forecasting core inflation to rise to around 2.5% in the fiscal year ending March 2026.
Some analysts predict further rate hikes, with one co-portfolio manager at T. Rowe Price suggesting that the policy rate could reach 1% by the end of the year, or even exceed 1%, which is closer to the lower end of the Bank of Japan’s neutral rate range.
