The Bank of Japan (BOJ) has raised its short-term policy rate to 0.5%, the highest level in 17 years, after consumer price increases accelerated in December.
The hike comes shortly after data revealed that Japan’s inflation had reached its fastest pace in 16 months, with core consumer prices rising 3% year-on-year in December.
This is the BOJ’s first rate increase since July, and Governor Kazuo Ueda had signaled the move in advance to avoid market surprises, following a previous rate hike in July that led to a global stock market selloff.
The BOJ’s decision to raise rates now gives it more room to cut rates in the future if necessary to stimulate the economy. The central bank aims to gradually increase rates to around 1%, a level seen as neutral for the economy, neither stimulating nor slowing growth.
Economists anticipate further rate hikes. Neil Newman of Astris Advisory Japan noted that as wages rise, inflation stays above 2%, and economic growth continues, the BOJ will likely continue its tightening policy. Stefan Angrick, an economist at Moody’s Analytics, predicted another 25-basis point hike in six months.
The rate hike marks a shift for Japan, which had kept interest rates near zero for years due to stagnant price growth. Last year’s rate hike ended the era of negative interest rates, which had been used by several countries to encourage spending over saving.
