Tokyo (AFP) – The Bank of Japan hiked interest rates to a 30-year high on Friday and indicated more were in the pipeline as it said the economy had shown signs of improvement. The unanimous vote to lift the main borrowing rate to 0.75 percent from 0.5 percent came hours after official data showed the country’s core inflation rate held steady in November but was still well above policymakers’ two percent target.
The bank began hiking rates from below zero in March last year as figures signalled an end to the country’s “lost decades” of stagnation, with inflation surging. However, with worries about the global outlook and US tariffs growing, it paused, with the last increase in January taking rates to their highest level in 17 years. “Uncertainties over the US economy and its tariff policy are still remaining, but declining” compared with the last policy meeting in October, BoJ governor Kazuo Ueda told reporters.
Next year’s annual wage hike negotiations will likely see sound increases, and the “possibility is high that the mechanism of a gradual rise in both wages and prices will continue” in line with the bank’s main scenario of economy and prices, Ueda said when asked about reasons for the rate hike. “Japan’s economy has recovered moderately,” bank officials wrote in a report released after the decision. As long as economic activity and prices improved, they added, the bank would “continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
While Friday’s increase was widely anticipated by analysts, “the board’s hawkish messaging suggests that the tightening cycle has further to run,” said Abhijit Surya of Capital Economics. “Our own view is that the incoming data are more likely than not to surprise to the upside of the BoJ’s expectations,” Surya added, forecasting rates will reach 1.75 percent in 2027. The next timing and pace of rate hikes “depend on conditions of economy, prices, and financial situations,” Ueda told reporters.
The yen weakened against the dollar after the announcement, which puts rates at their highest since 1995. The yen has been under pressure in recent years mainly because of the big difference between US and Japanese rates. The cheap yen has been blamed for pushing up import prices, contributing to inflation in Japan. “Several board members pointed out that the recent cheaper yen is having an upward impact on import prices and domestic prices,” Ueda said.
Yields on Japanese government bonds have spiked in recent weeks on worries about Prime Minister Sanae Takaichi’s budget discipline, while the yen has weakened. On Friday, the yield on the benchmark 10-year Japanese government bond rose to 2.01 percent, its highest since 1999. The core consumer price index — which excludes volatile fresh food — came in at three percent in November, the same rate as the previous month and in line with expectations. However, it is well above the BoJ’s two percent goal, as it has been for some time.
Takaichi, who formally took power in October, has made fighting inflation a major priority. Her government this week succeeded in getting parliament approval for an extra budget worth 18.3 trillion yen ($118 billion) to finance a massive stimulus package. She has long advocated for more government spending and loose monetary policy to spur growth. Since taking office, however, she has said monetary policy decisions should be left to the BoJ.
The inflation figures for November showed rice prices jumped 37 percent year-on-year, the internal affairs ministry said. The cost of the grain has skyrocketed because of supply problems linked to a very hot summer in 2023 and panic-buying after a “megaquake” warning last year, amongst other factors. Japan’s economy contracted 0.6 percent in the third quarter, but Ueda said last week that the impact of US tariffs was less than feared. “So far, companies have swallowed the burden of tariffs,” but in the future could pass them through to consumer prices, which the bank “will monitor,” Ueda said.
© 2024 AFP
