By Leika Kihara and Makiko Yamazaki
Tokyo (Reuters): The Bank of Japan raised interest rates on Friday to their highest since the 2008 global financial crisis and revised its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable. around its 2% target.
The decision marks its first tariff increase since July last year and comes days after the inauguration of US President Donald Trump, who is likely to keep global policymakers vigilant ahead of the potential repercussions of higher tariffs.
BOJ Governor Kazuo Ueda said at a news conference that the weak yen continued to put upward pressure on import prices, while wage increases were becoming more integrated and broad across companies.
“We don’t have a pre-set idea,” he said of the timing of the next rate increase, saying the BOJ will make a decision on a meeting basis to see the data available at that time.
At its two-day meeting that concluded on Friday, the BC increased its short-term policy rate from 0.25% to 0.5%, a level Japan has not seen in 17 years. It was held in an 8-1 vote with board member Toyoaki Nakamura dissenting.
The widely expected move underscores the central bank’s resolve to steadily raise interest rates to around 1% – seen by A-level analysts as cooling or overheating Japan’s economy.
It also marks another step that Japan is shaking off the deflation and stagnant economic growth that dogged the country for decades.
“The likelihood of achieving the BOJ’s outlook has increased,” with many companies saying they will continue to raise wages steadily in this year’s annual wage negotiations, the central bank said in a statement announcing the decision.
“Core inflation is rising towards the BOJ’s 2% target,” the central bank said, adding that financial markets remain stable as a whole.
The BOJ made no changes to its guidance on future policy, saying it will continue to raise interest rates if its economic and price forecasts come true.
But he removed a phrase that emphasized the need to analyze the risks surrounding foreign economies and markets, underscoring his belief that strong U.S. growth will sustain Japan’s economy, at least for now.
The BOJ revised its inflation forecasts and said risks to the price outlook were skewed to the upside, signaling its focus on the growing case for more tariff increases.
“Their logic remains the same. They are still far from neutral, so it is natural to make an adjustment,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
“Unless the BC changes the logic of the rate increases, or even increases the neutral point, which they have been mulling, around 1%, there is not much room for the market to price in more increases in the future “.
However, the BOJ’s path is tied to uncertainty, with trade uncertainties and Trump calling for further rate cuts from the US Federal Reserve and similar action from central banks around the world.
The yen rose about 0.5% to 155.32 per dollar after the BOJ decision and inflation improvements, while the two-year Japanese government bond () yield rose to 0.705%, the highest since October 2008.
In its quarterly Outlook report, the Board raised its price forecasts to project core inflation moving to its target of 2% or higher for three consecutive years.
It also said risks to the inflation outlook were skewed to the upside amid intensifying labor shortages, rising rice prices and the push to import costs from a weak yen.
“With regard to this year’s annual wage negotiations, companies have expressed many opinions that they will continue to increase wages steadily,” the report said.
Japan’s union chief told Reuters on Friday that Japanese annual wage increases must exceed the 5.1% secured last year as real wages decline.
The Board now projects core consumer inflation to reach 2.4% in fiscal 2025 before declining to 2.0% in 2026. In the previous projection made in October, it expected inflation to reach 1.9% in the fiscal year 2025 and 2026.
It made no change to its forecasts that Japan’s economy will grow 1.1% in fiscal 2025 and 1.0% in 2026.
While the U.S. economy has been stable in strong and financial markets as a whole, the BOJ should remain alert to uncertainties surrounding the conduct of U.S. policy, the report said.
“The hike can be expected, but in what feels like the first time in a long time, there were no major downgrades to their economic outlook,” said Matt Simpson, senior market analyst at City Index in Brisbane.
“This keeps the door open to another 25bp hike by the end of the year, and rates to sit at a whopping 0.75%.”
Japan’s core consumer inflation accelerated to 3.0% in December, the fastest annual pace in 16 months, data showed earlier Friday, in a sign that rising fuel and food prices continue to push up costs. life for homes.
After taking the helm in April 2023, UEDA dismantled its predecessor’s sweeping stimulus program in March last year, and raised short-term interest rates to 0.25% in July.
BOJ policymakers have repeatedly said the central bank will continue to raise rates, if Japan moves toward achieving a cycle in which rising inflation raises wages and lifts consumption, allowing businesses to continue spending higher costs.