The Bank of Japan raised on Friday its key policy interest rate to a 30-year high of around 0.75 percent, up from about 0.50 percent, as it seeks to contain persistent inflation driven by the weak yen.
The hike pushes interest rates to levels not seen since 1995, when Japan was grappling with the fallout from the bursting of an asset-price bubble that plunged the central bank into a prolonged fight against deflation.
Bank of Japan to raise policy rate further depending on economic developments
The central bank’s first rate increase since January came amid expectations that the momentum for wage hikes will continue into next year. The rate decision was the first under the government of Prime Minister Sanae Takaichi.
At the end of its two-day meeting, all nine Bank of Japan Policy Board members voted for the increase. In a statement released after the meeting, the bank said the likelihood of realizing its baseline inflation scenario has been rising, a prerequisite for further hikes.
Japan’s core consumer prices have remained at or above the central bank’s 2 percent inflation target for more than three and a half years.
The Bank of Japan added that it judged it “appropriate” to adjust the degree of monetary accommodation to achieve its inflation goal, adding that it will continue to raise its policy rate depending on economic and price developments, as monetary conditions are still accommodative despite the latest interest rate increase.
Yen weakens following the decision
However, the yen weakened after Governor Kazuo Ueda gave little guidance on how far the central bank might ultimately lift rates, saying only that the pace and timing of further increases would depend on how the economy responds to each policy move.
Japan’s 10-year government bond yield surged to a 26-year high following the bank’s rate decision. However, the absence of clear hawkish signals from Ueda sparked a broad-based sell-off in the yen, pushing the dollar to a one-month high above 157 yen.
In its statement, the Bank of Japan reiterated its view that underlying inflation is expected to converge toward its 2 percent target in the latter half of its three-year outlook period, extending through fiscal 2027.
The increase to 0.75% brings the central bank’s policy rate closer to the lower end of its estimated 1.0–2.5 percent neutral rate range, which neither restrains nor stimulates economic activity. As a result, markets closely watched Ueda’s remarks on the neutral rate for clues about how high this tightening cycle might ultimately go.
For more news on banking & finance, click here.
