Bank of Japan raises policy interest rate to 0.5 percent, highest in 17 years

Markets are pricing in one more 25-basis-point interest rate hike for Japan by the end of this year

The Bank of Japan said it will continue to raise the key short-term rate if the economy and prices move in line with its expectations

Published: Fri 24 Jan 2025, 2:59 PM

The Bank of Japan raised its policy interest rate to 0.5 percent from 0.25 percent on Friday, its highest level in about 17 years. It also revised its inflation forecasts up, underscoring its confidence that rising wages will keep inflation stable around its 2 percent target.

The decision marks the central bank’s first rate hike since July last year and comes only days after the inauguration of U.S. President Donald Trump, who is set to increase tariffs on key global players.

The Bank of Japan said it will continue to raise the key short-term rate if the economy and prices move in line with its expectations.

Central bank raises inflation forecasts

The widely expected interest rate hike marks another step that Japan is taking away from deflation and stagnant economic growth that has impacted the country for decades.

The bank also lifted its projections for the core consumer price index, excluding volatile fresh food, for the three years through fiscal 2026 in its latest outlook released the same day.

The bank now estimates that the index will grow 2.7 percent in fiscal 2024, 2.4 percent in fiscal 2025 and 2.0 percent in fiscal 2026, compared with the previous forecasts of 2.5 percent, and 1.9 percent, and 1.9 percent, respectively.

The yen rose 0.8 percent to 154.845 per dollar following the policy decision but is now trading at 155.86. The two-year JGB yield also briefly rose to 0.725 percent, a level last seen in October 2008, before declining to 0.720 percent.

Markets are pricing in one more 25-basis-point interest rate hike for Japan by the end of this year.

Read| WEF 2025: $7.1 billion committed to climate and health, yet most affected countries face challenges

Inflation hovers near central bank target

In its January outlook for economic activity and prices, the Bank of Japan expects the Japanese economy to keep growing at a robust pace this month. However, there are still some concerns about the country’s prices and economic activity.

Recent price data shows inflation hovering at about the central bank’s 2 percent target. Government data released hours before the decision showed consumer prices, excluding volatile food prices, rose last year at an average rate of 2.5 percent, marking the third straight year of increase. The consumer price index (CPI), excluding food, for the month of December alone showed a 3 percent rise.

Another long-term concern for Japan was wage growth. Recent data shows that Japanese workers are gaining better wages and are generally set to receive solid pay raises in their upcoming annual union negotiations. The labor ministry adjusted its wage data for November to a rise of 0.5 percent, instead of a decline, helping support the Bank of Japan’s interest rate hike decision.