The Bank of Japan (BOJ) raised its key short-term policy rate on Friday to 0.5%, marking the highest level in 17 years.
This rate hike, the first since July 2023, is part of the BOJ’s strategy to move towards a more standard monetary policy after years of ultra-low rates aimed at stimulating the economy. The decision was made following a two-day meeting and was approved by an 8-1 vote, with one board member dissenting.
This move underscores the BOJ’s confidence in Japan’s economic recovery and the ongoing rise in wages, which are helping to push inflation closer to the bank’s 2% target. Despite inflation reaching 3% in December, well above the central bank’s target, the BOJ has expressed optimism that this trend will be sustainable as wage gains continue to support consumer spending.
The rate increase also comes amid growing confidence that Japan’s economy will maintain steady growth, with the central bank forecasting core inflation to reach 2.4% by fiscal 2025. This marks an upward revision from earlier forecasts. The BOJ noted that while inflation is increasing, financial markets remain stable, and the nation’s economic outlook is improving.
In a broader context, the BOJ’s move represents a shift away from its previous stimulus-heavy approach, which had kept rates at extremely low levels for years. The central bank plans to continue raising rates incrementally, with an eye on a neutral rate of around 1%, which is seen as neither stimulating nor cooling the economy.
Following the announcement, the Japanese yen briefly weakened before stabilizing around 155.94 against the US dollar. Bond yields also saw a slight increase, with the two-year Japanese government bond rising to its highest level since October 2008.
With input from Reuters, Bloomberg, and the Associated Press.
