Japan increases interest rates at the highest level in 17 years

Japan increases interest rates at the highest level in 17 years

The Bank of Japan (Boj) has increased interest rates on Friday to the highest level since the global financial crisis in 2008. This decision shows the bank's trust that increasing wages will help to keep inflation stable to keep the target of 2 %.

first interest rate increase in over a year

This decision marks the first rate increase since July of last year and takes place just a few days after the inauguration of US President Donald Trump, whose policy could possibly influence global financial markets. At the two -day meeting, which ended on Friday, the Boj raised the short -term key interest rate from 0.25 % to 0.5 % - a level that Japan had not reached for 17 years. The vote was 8 to 1, with the board member Toyoaki Nakamura.

destinations of the BOJ and market reaction

The generally expected step shows the central bank's decision to gradually increase interest rates to about 1 %, which is regarded by analysts as a level that should neither cool nor overheat the Japanese economy. In a statement on the decision, the bank said: "The likelihood of achieving the Boj's forecast has increased." Many companies stated that they would continue to raise wages in the ongoing wage negotiations.

inflation risks and future outlook

In a quarterly outlook, the board raised its price forecasts and expects that core inflation for three consecutive years is above the target of 2 %. It was also pointed out that the risks for inflation development are distorted, which is due to an increasing shortage of labor, rising travel prices and the higher import costs by the weak yen. "As far as the annual wage negotiations are concerned this year, many companies have expressed that they will continue to increase wages gradually," said the report.

forecasts for consumer price development

The Boj now expects the core consumer prices to increase by 2.4 % in the financial year 2025 before they drop to 2.0 % in 2026. In the previous forecast in October, an inflation rate of 1.9 % was assumed in 2025 and 2026. The forecasts for the growth of the Japanese economy remained unchanged at 1.1 % in the financial year 2025 and 1.0 % in 2026.

The effects of global uncertainties

Although the US economy is stable and the financial markets are quiet as a whole, the Boj must be aware of the uncertainties that arise from US politics. "The interest rate increase was expected, but there was the feeling that there was no significant downgrading of the economic prospects for the first time in a long time," Matt Simpson, a senior market analyst at City Index in Brisbane. “This keeps the door open for a further increase of 25 basis points by the end of the year, with an interest rate of 0.75 %.”

Core inflation in Japan accelerated to 3.0 %in December, the fastest annual increase in 16 months, which indicates the increasing fuel and food prices that have increased the cost of living of households. After taking office in April 2023, Ueda abolished his predecessor's radical stimulus program in March of last year and raised short -term interest rates to 0.25 % in July. The decision -makers of the BOJ have repeatedly explained that the central bank will further increase interest rates if Japan progresses to achieve a cycle in which increasing inflation raises wages and promotes consumption, which enables companies to pass on higher costs.