Japan’s central bank, the Bank of Japan (BOJ), has raised its borrowing cost to its highest level in 17 years in response to rising consumer prices. The BOJ’s decision to increase its short-term policy rate to “around 0.5 percent” comes after the latest data revealed that inflation accelerated in December, with prices rising at their fastest pace in 16 months.
The rate hike follows the BOJ’s last increase in July, which, combined with a weaker-than-expected US jobs report, caused a global stock market selloff. However, this time, BOJ Governor Kazuo Ueda had signaled the rate change in advance, aiming to prevent a market shock.
Official figures released on Friday show that Japan’s core consumer prices climbed 3% in December from the previous year, further fueling concerns about inflation. This marks the first rate increase since July, just days after Donald Trump returned to the White House. The former president’s campaign rhetoric, which included threats to impose tariffs on all imports to the US, could potentially impact countries like Japan that rely heavily on exports.
By raising rates now, the BOJ positions itself to have more flexibility to lower rates in the future, should the need arise to stimulate the economy. The central bank has signaled that it aims to gradually raise rates toward a target of around 1%, a level that would neither stimulate nor slow economic growth.
“We expect rates to continue rising as wages increase, inflation stays above 2%, and there is some economic growth,” said Neil Newman, head of strategy at Astris Advisory Japan. Stefan Angrick, an economist at Moody’s Analytics, also forecasts another 25-basis point hike within the next six months.
The BOJ’s move marks a shift from its years-long policy of ultra-low rates, which were implemented to combat stagnant price growth. In 2022, Japan’s central bank raised the cost of borrowing for the first time since 2007, ending the global era of negative interest rates. Negative rates, used by several countries to encourage spending rather than saving, had required individuals to pay to deposit money in banks.
With inflation showing signs of persisting above 2%, Japan is now navigating a delicate balancing act as the BOJ prepares to adjust interest rates further in line with economic conditions.
