Written by Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) – The Bank of Japan raised interest rates on Friday to their highest levels since the 2008 global financial crisis, underscoring its confidence that rising wages will keep inflation stable around its 2% target.
The decision marks its first move since July last year and comes days after US President Donald Trump's inauguration, which is likely to keep global policymakers ahead of potential fallout from threatened higher tariffs.
At its two-day meeting on Friday, the BOJ raised the short-term policy rate from 0.25% to 0.5% – a level not seen in Japan in 17 years. It was made in an 8-1 vote with board member Toyoaki Nakamura dissenting.
The widely expected move underscores the central bank's intent to steadily raise interest rates to around 1% — which analysts see as not cooling Japan's economy.
“The likelihood of meeting BOJ expectations has risen,” the central bank said in a statement announcing the decision, as many companies said they would continue to raise wages steadily in this year’s annual wage negotiations.
“Core inflation is increasing towards the BOJ target of 2%,” the central bank said, adding that financial markets remain stable as a whole.
The BOJ offered no change to its guidance on future policy, saying it would continue to raise interest rates if its economic and price forecasts come true. But it removed a phrase stressing the need to scrutinize risks surrounding external economies and markets.
“Their logic remains the same. They are still far from neutral, so it is natural to make an adjustment,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
“Unless the BOJ either changes the logic of higher rates, or even raises the neutral point, which it has been considering – around 1% – there will not be much room for pricing to move higher in the future.”
The yen rose about 0.5% to 155.32 per dollar after the decision, while the Japanese government's two-year yield)
Attention now turns to any evidence from BOJ Governor Kazuo Ueda in a post-investigation briefing at 0630 GMT on the pace and timing of further increases.
In its quarterly Outlook report, the Governing Council raised price expectations to project core inflation has been moving at or above its target for three consecutive years.
He also said risks to inflation expectations were skewed to the upside amid labor shortages, higher rice prices and an increase in import costs from a weak yen.
“With regard to this year’s annual wage negotiations, there were many views expressed by companies that they would continue to raise wages steadily,” the report said.
The head of Japan's Union Union Group told Reuters on Friday that Japan's annual wage increases should exceed the 5.1% guaranteed last year as real wages continue to decline.
The Governing Council now projects core consumer inflation to reach 2.4% in fiscal 2025 before slowing to 2.0% in 2026. In the previous projection made in October, it expected inflation to reach 1.9% in both fiscal 2025 and 2026.
There was no change in its forecast that the Japanese economy will grow 1.1% in fiscal year 2025 and 1.0% in 2026.
The report said that although the US economy was strong and financial markets as a whole were stable, the BOJ should be alert to the uncertainty surrounding US policy behavior.
“The rise may have been expected but for the first time in a very long time, there have been no significant downgrades in their economic outlook,” said Matt Simpson, chief market analyst at City in Brisbane.
“This keeps the door open to a 25-put rise at the end of the year, and rates to sit at a whopping 0.75%.”
Core consumer inflation in Japan accelerated to 3.0% in December, the fastest annual pace in 16 months, data showed earlier on Friday, in a sign that fuel and food prices continue to push up households' costs of living.
After taking charge in April 2023, Ueda dismantled his predecessor's radical stimulus program in March last year, raising short-term interest rates to 0.25% in July.
BOJ policymakers have repeatedly said the central bank will continue to raise rates, if Japan makes progress in achieving a cycle in which higher inflation boosts wages and escalates business consumption — allowing companies to continue passing on higher costs.
