The Bank of Japan (BOJ) raised its benchmark interest rate by 25 basis points to 0.5% on Friday, marking the highest level since 2008. The long-awaited move signals the central bank’s intent to normalize monetary policy amid rising inflation and wage growth.
A Divided Decision
The decision was approved by an 8-1 vote, with board member Toyoaki Nakamura dissenting. Nakamura argued that the BOJ should wait for corporate earnings data before adjusting its policy.
Following the announcement, the Japanese yen strengthened 0.6% to 155.12 per dollar, while Japan’s benchmark Nikkei 225 index saw a modest gain. Meanwhile, yields on 10-year Japanese government bonds rose 2.5 basis points to 1.23%.
Wage Growth in Focus
The BOJ has consistently emphasized the need for a “virtuous cycle” where rising wages fuel inflation before committing to rate hikes. The central bank noted that many firms plan to continue increasing wages during this year’s annual shunto labor-management negotiations.
Tomoko Yoshino, President of the Japanese Trade Union Confederation (Rengo), stated that annual wage hikes this year must exceed the 5.1% increase secured in 2024 to compensate for declining real wages. Rengo is formally seeking:
- 5% overall wage increases for workers.
- 6% hikes for smaller firms to reduce income disparities.
Inflation Continues to Rise
Japan’s inflation has been gradually increasing:
- December’s headline inflation: 3.6% (highest since January 2023).
- Core inflation: 3% (16-month high).
- BOJ forecast: Headline inflation likely to remain around 2.5% through March 2026, influenced by import costs due to the yen’s depreciation.
More Rate Hikes Ahead?
With inflation and wage growth picking up, some analysts predict further rate hikes. Vincent Chung, co-portfolio manager at T. Rowe Price, stated:
“A rate increase will be followed by a series of gradual hikes, potentially bringing the policy rate to 1% by the end of the year.”
Chung added that rates could even surpass 1%, aligning with the lower end of the BOJ’s estimated neutral rate range.
The Yen and Currency Intervention
The yen has experienced significant volatility:
- Last July, the yen fell to 161.96 per dollar, its weakest since 1986.
- Japan spent 5.53 trillion yen ($36.8 billion) in July 2024 to stabilize the currency.
- Throughout 2024, the country spent over 15.32 trillion yen ($97.06 billion) in interventions.
Despite concerns over yen depreciation, Chung noted that major currency interventions like those seen last year are unlikely in 2025.
Global Market Implications
Chung also pointed out that rising U.S. inflation and economic growth could push U.S. yields higher, strengthening the dollar and weakening the yen.
“With potential major policy shifts in trade and the Fed nearing a pause, the two-sided risk to growth is likely greater this year than in 2024.”
As a result, he expects high volatility in USD/JPY exchange rates throughout 2025.
Conclusion
The BOJ’s rate hike marks a significant step in Japan’s monetary policy shift. With inflation rising and wage negotiations underway, further tightening remains a possibility. However, uncertainty around global trade policies and currency fluctuations will play a key role in shaping Japan’s economic outlook in the months ahead.
