The Bank of Japan (BoJ) has hiked interest rates to 0.5%, the highest level since 2008.
The central bank voted for the 25 basis points increase by 8-1, with BoJ governor Kazuo Ueda signalling the hike was in response to rising inflation and wages.
In December, core inflation in Japan rose 3% over the previous year.
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Chris Scicluna, head of research at Daiwa Capital Markets Europe, said the rate rise marks a “historic shift”, as it shows the BoJ’s determination to steer Japan out of decades of ultra-low interest rates.
“This is the highest since 2008, reflecting an environment where inflation has proven persistent, thanks in part to a mix of rising rice and oil prices, and yen weakness. While the rate hike itself was well-telegraphed, its real significance lies in the Bank signalling that Japan’s economy, buoyed by solid corporate profits and wage growth, might finally be ready to join the global club of normalised monetary policy.
“The BoJ has signalled that it wants to push rates higher still, to levels that we have not seen in Japan since 1995. So, it is approaching uncharted waters: the BOJ has embarked on a journey that will test how far it can go without unsettling the nation’s fragile consumption or broader financial stability.”
The big surprise from the BoJ meeting was the 50bps increase to its inflation forecast for fiscal year 2025, according to Sam Jochim, economist at EFG Asset Management.
The revised forecast implies that there is room for more interest rate increases this year than was previously thought to be the case, he said.
Claire Huang, senior EM macro strategist, Amundi Investment Institute, also anticipates further movement on interest rates this year.
“Japan’s macroeconomic and inflation cycles are currently out of sync with those of other developed economies. Since last summer, Japan started to register positive real wage growth alongside inflation driven by domestic demand,” she said.
“This favourable wage-inflation dynamic supports the Bank of Japan’s potential for further rate hikes this year. We anticipate one additional hike of 25 basis points in July, which would raise Japan’s policy rate to 0.75%.
“The tightening effects of these hikes are expected to be mitigated by increased returns on savings and ongoing wage growth.”