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The Bank of Japan has raised short-term interest rates to “around 0.5 per cent”, the highest level in 17 years, in a well-signalled move that continues its efforts to “normalise” monetary policy.
The central bank’s decision, by a vote of 8-1, raised the policy rate from 0.25 per cent to its highest level since the 2008 global financial crisis. The move followed weeks of speculation over whether governor Kazuo Ueda would wait for stronger evidence of rising Japanese wages and sustainable inflation.
In a statement accompanying the decision on Friday, the BoJ said Japan’s economic activity and prices were developing in line with the central bank’s outlook. “The likelihood of realising the outlook has been rising,” it said.
The yen, which had been edging higher against the dollar in the weeks preceding the BoJ’s two-day policy meeting, strengthened about 0.6 per cent to ¥155.15 following the announcement. Investors raised bets that Ueda might target an additional rate rise in July as he seeks to entrench a departure from decades of ultra-accommodative policy.
The BoJ said because real interest rates remained at very low levels, if economic activity and price increases achieved the levels forecast in its outlook, it would continue to raise the policy rate.
But currency traders said the moves were still cautious and they were “ready for anything” when Ueda delivers his press conference later in the afternoon. In previous months, Ueda’s comments have led to confusion and sparked sharp currency moves.
The BoJ’s previous rate rise in July, which surprised most analysts, triggered a phase of extreme volatility in the yen and a one-day “flash-crash” in Japanese equities, which recovered shortly afterwards.
Several hours before the BoJ announcement, official data showed Japan’s core consumer prices rose 3 per cent in December from a year earlier. The growth, partly driven by the cutting of government energy subsidies, marked the highest annual pace of inflation in 16 months.
The central bank is targeting a stable inflation rate of about 2 per cent. In its outlook statement, it said it foresaw consumer price inflation excluding fresh food at 2.5 per cent for fiscal 2025. The BoJ highlighted elevated rice prices among factors that were likely to underpin inflation.
The central bank repeated its previous warning that its decision-making would require “due attention” to financial and foreign exchange markets.
“With firms’ behaviour shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices,” it said.
The BoJ’s decision came in the shadow of Donald Trump’s return to the US presidency this week.
Analysts had warned that while Japanese wage and price growth were sufficient to justify a rate rise, the BoJ had signalled its concern that it would have to postpone any move if the incoming president’s comments or executive orders stoked market turmoil.