BOJ Decides to Raise Policy Rate to 30-Year High
The Bank of Japan on Friday (December 19) decided to raise its policy interest rate to a level unseen in 30 years, in its first rate hike since January this year.
- The Bank of Japan (BOJ) unanimously raised its key policy rate from around 0.5% to 0.75%, its highest level since September 1995.
- The decision was driven by confidence that companies will implement steady wage hikes and that economic uncertainties from US trade policy have eased.
- A key motivation for the rate hike was to prevent further depreciation of the yen, which could raise import prices and fuel inflation.
- The central bank stated it will continue to raise the policy rate if the economy and prices develop in line with its projections.
At a two-day meeting on Thursday, the BOJ's nine-member Policy Board unanimously decided to hike its target for the unsecured overnight call rate, a key interbank rate, to around 0.75 per cent from around 0.5 per cent.
The BOJ's policy rate had not exceeded 0.5 per cent since September 1995, when the bank lowered its official discount rate, then its policy rate, from 1.0 per cent to 0.5 per cent.
After its previous rate hike in January this year, the BOJ kept its policy rate intact for six policy-setting meetings in a row.
The latest rate hike will be the fourth since the central bank decided to scrap its negative interest rate policy in March 2024, and the first since the launch in October this year of the administration of Japanese Prime Minister Sanae Takaichi, who advocates an aggressive but responsible fiscal policy.
The BOJ judged that price and economic uncertainties stemming from the high tariff policy of US President Donald Trump's administration had eased, while companies were on track to implement steady wage hikes in next year's "shunto" spring labour-management negotiations.
Corporate profits, which fund wage hikes, are "expected to remain at high levels on the whole, even after taking into account the impact of tariff policies," the BOJ said in a statement released after the latest decision.
"The risk of firms' active wage-setting behaviour being interrupted is expected to be low," based on surveys of companies conducted by the BOJ's head office in Tokyo and regional branches, it said.
Amid continued corporate moves to pass on wage hikes in sales prices, "the mechanism by which both wages and prices rise moderately will likely be maintained," the central bank said.
The latest decision is also believed to have been influenced by concerns that if the BOJ decided not to raise interest rates, additional inflation may be triggered from rises in import prices on the back of further depreciation of the yen.
"Japan's economy has recovered moderately, although some weakness has been seen in part," the BOJ said in the statement, adding, "Accommodative financial conditions will continue to firmly support economic activity."
The BOJ said that the bank will "continue to raise the policy interest rate and adjust the degree of monetary accommodation" if the economy and prices move in line with its projections.
[Copyright The Jiji Press, Ltd.]
