Tokyo – The Bank of Japan (BoJ) has raised interest rates to their highest level since the 2008 global financial crisis, showing that they believe higher wages will help keep inflation around their target of 2%. They increased the interest rate by 0.25% to a total of 0.5%. This is the first increase since last July, just a few days after Donald Trump became U.S. President, which might affect trade decisions.
During a meeting, the BoJ changed its short-term policy rate, which had been at 0.25%, to 0.5%. This level hasn’t been seen in Japan in 17 years. The decision was made with an 8-1 vote, and one member disagreed.
The central bank wants to gradually raise interest rates to about 1%, which many experts believe would be a balanced level for the economy. They are optimistic because many companies plan to raise wages in their yearly discussions about pay. The BoJ noted that inflation is moving closer to their 2% goal, and the overall financial market in Japan is stable.
The BoJ didn’t change its future plans, indicating they will continue to raise rates if the economy improves as expected. Naka Matsuzawa, a chief strategist, said this isn’t a strict tightening of policy but more like a lighter easing. He believes there isn’t much room for more rate hikes now unless the BoJ changes its strategies.
After the rate increase announcement, the dollar went down slightly against the yen, while the two-year Japanese government bond yield rose to its highest point since October 2008. People are now looking forward to hearing from Governor Kazuo Ueda about future rate increases.
In a new report, the BoJ raised its forecasts for prices, expecting inflation to hit 2.4% in 2025. Before this, they had forecasted it as 1.9%. The bank expects Japan’s economy will grow by 1.1% in 2025 and 1.0% in 2026. In December, Japan’s core inflation reached its highest level in 16 months, mainly because of rising prices for food and fuel.
Since taking over in April 2023, Ueda has reversed the previous extreme stimulus measures and raised rates to 0.25% in July. The BoJ officials have stated they will keep increasing rates if inflation rises and wages go up, which should help consumers and enable companies to pass on higher costs.
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