The Bank of Japan raised interest rates on Friday to levels unseen in three decades and signalled its readiness for further hikes, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs. It also removed language that growth and inflation will stagnate due to the impact of higher U.S. tariffs, underscoring the central bank’s conviction that Japan was on course to stably hit its 2% inflation target backed by wage gains, and ready for a continued normalisation of monetary policy.
“Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained,” the BOJ said in a statement in explaining the rate-hike decision. “Given that real interest rates are at significantly low levels, the BOJ will continue to raise interest rates” if its economic and price forecasts materialise, it said. In a widely expected move, the BOJ raised short-term interest rates to 0.75% from 0.5% in the first increase since January. The decision was made by a unanimous vote. The move takes interest rates to levels unseen since 1995, when Japan was reeling from the burst of an asset-inflated bubble that drew the BOJ into a prolonged battle with deflation.
The central bank offered a slightly more upbeat view on the economy than at its previous meeting in October, saying it was likely to “grow at a moderate pace”. In October, it said growth was likely to stagnate due to the impact of U.S. tariffs. Underscoring its optimism on the price outlook, it also tweaked its language on underlying inflation to say it will continue to gradually heighten, in contrast to the view in October that it will stagnate for the time being. But Governor Kazuo Ueda remained vague on the exact timing and pace of future interest rate hikes. “As for the pace of how we adjust our monetary support, that will depend on economic, price, financial developments at the time,” he said in a press conference. “We will update at each meeting our views on the economic, price outlook as well as risks and the likelihood of achieving our forecasts, and make an appropriate decision.” The yen slid, the Nikkei stock average rose and the benchmark 10-year government bond yield jumped to a 26-year peak after the policy announcement.
