On Friday, the Bank of Japan (BOJ) made headlines by raising its key policy interest rate by 25 basis points, setting it at 0.5%. This marks its first rate increase since 2008 and signifies a step towards normalizing monetary policy, prompted by improving economic conditions domestically.
Key Points to Note:
- The decision to raise rates was mostly supported, passing with an 8-1 vote, though board member Toyoaki Nakamura had reservations.
- The policy rate is now the highest it has been since 2008.
- The BOJ has hinted at the possibility of gradual rate increases extending through 2025.
- Wage negotiations will be a critical factor for future policy adjustments.
This move comes on the back of extensive interventions in the currency markets over the past year. Japanese authorities have spent upwards of 15.32 trillion yen to bolster the currency. With the yen recently showing weakness, officials appear more focused on monetary policy normalization as a strategy for financial stability rather than direct foreign exchange interventions.
Interestingly, only one policymaker, Toyoaki Nakamura, opposed the rate hike. He argued that any changes to money market operation guidelines should wait until there is a verified increase in companies’ earnings power.
For further details, you can explore the official Bank of Japan Monetary Policy Decision document from January 2025.
In tandem with this rate announcement, the BOJ unveiled their Monetary Policy Outlook, sharing updated growth and inflation predictions:
- The median forecast for core CPI in fiscal 2025 rises to 2.4%, up from the previous forecast of 1.9% in October.
- For the next year, the core CPI forecast climbs to 2.0%, slightly above the prior estimate of 1.9%.
During a press briefing, Governor Ueda emphasized that upcoming policy decisions would be more influenced by inflationary pressures rather than strictly adhering to economic growth metrics. He acknowledged that while they can’t fully dismiss the threat of a deflation return, they are optimistic about real wages rising post "shunto" wage discussions.
Market Response:
The reaction in the currency markets was swift. Following the combined release of the monetary policy announcement and news of “hawkish hike,” the yen strengthened. Initially trending lower after recent national core CPI data, the yen reversed direction.
The USD/JPY pair fell by 0.3% to 155.61, with the yen making strides across various currencies. It maintained an advantage over the Swiss franc (gaining 0.17%) and the British pound (up 0.12%), though it did relinquish some of its post-announcement gains to the Australian dollar (-0.11%) and New Zealand dollar (-0.21%) after the press conference.
