TOKYO: The Bank of Japan raised interest rates on Friday to levels unseen in three decades and signaled its readiness for further hikes beyond next year, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.
The move underscored 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.
“Real interest rates are expected to remain significantly negative after the policy change, and accommodative financial conditions will continue to firmly support economic activity,” the BOJ said in a statement announcing the decision.
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.
“Given that real interest rates are at significantly low levels, the BOJ will continue to raise interest rates and adjust the degree of monetary accommodation” if its economic and price forecasts materialise, the central bank said in the statement.
Markets are focusing on Governor Kazuo Ueda’s post-meeting news briefing for clues on the pace and extent of future rate rises, which may have global market repercussions by altering the yen’s status as a cheap source of funding for investors.
Challenges around the next move
Ueda faces a tricky communication act.
Given Japan’s fragile economy, Ueda is likely to avoid pre-committing to a set pace of rate hikes. But he also faces pressure to deliver a
hawkish message to avoid triggering an unwelcome yen slump that pushes up import costs and broader inflation, analysts say.
Friday’s hike to 0.75% would also bring rates closer to levels deemed neutral to the economy, which the BOJ estimates as in a range of 1% to 2.5%, and complicate the bank’s decision on how far to push up borrowing costs.
The BOJ ended a decade-long, massive stimulus last year and raised rates twice including to 0.5% from 0.25% in January on the view Japan was on the cusp of durably achieving its 2% inflation target.
With stubbornly high food costs keeping inflation above target for nearly four years, a growing number of BOJ board members have signaled their readiness to vote for a rate hike to avoid being late in addressing the risk of too-high inflation.
Data released on Friday showed core consumer inflation hit 3.0% in November, steady from the previous month and well exceeding the BOJ’s target.
Recent yen declines, which push up import costs and broader inflation, also helped the BOJ convince dovish premier Sanae Takaichi’s administration of the need for another rate increase.
The economy has shown resilience to higher US tariffs.
Recent central bank surveys showed business confidence hitting a four-year high and many firms on course to continue offering bumper pay next year.
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