BOJ Decides Further Policy Rate Hike

The Bank of Japan (BOJ) decided to raise its short-term policy rate to 0.5 percent in their Monetary Policy Meeting (MPM) in January 23 and 24. The bank estimated that certain volume of workers’ wage hike of companies can be expected in annual labor negotiations in this spring and that the impact of Trump 2.0 administration on the market was not great. It hopes to get a chance to raise the interest rate later this year.

The BOJ issued a statement that it would “encourage the uncollateralized overnight call rate to remain at around 0.5 percent.” It was the third rate hike since the bank terminated ultra-easy interest rate policy with application of short-term interest rate of 0 to 0.1 percent in March, 2024, followed by the second rate hike with 0.25 percent in July. The new rate of 0.5 percent became the highest one since October 2008.

 

In the previous MPM in December, 2024, the BOJ was skeptical about the interest rate hike. While acknowledging improvement of corporate profits, the bank took a stance that it would pay attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices. The JOB Governor, Kazuo Ueda, said that he needed “one more notch” for further rate hike.

 

The BOJ policy members adjusted their forecast of FY 2024 consumer price index (CPI) in the January meeting from 2.5 percent in last October to 2.7 percent. It is likely that Japan’s economy is reaching a goal of stable price inflation with 2 percent growth. “Japan’s economy has recovered moderately although some weakness has been seen in part,” says the statemen of MPM.

 

Main reason of the interest rate hike was positive minds of entrepreneurs for wage hike this spring. The annual spring labor negotiation in 2024 marked 5.33 percent of wage hike in average, the highest in the previous thirty-three years. It is expected that the same level or higher wage hike in this spring. Japanese Trade Union Confederation requires 6 percent of growth in average for this spring.

 

One the reasons why the BOJ refrained from policy rate hike in December was to watch how inauguration of US President Donald Trump would affect the activities in the markets. Although Trump delivered a number of executive orders to implement his campaign policies including America-first trade policies, he did not apply high tariff on the day one. “Markets have been stable as the broad direction of Trump's policies become clearer,” said Ueda in his press conference.

 

“The bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation,” says the MPM statement. It is expected that the bank will decide another interest hike at the second half of this year. If the policy rate goes beyond 0.5 percent, it will enter an unprecedently high level after 1995. While the government of Japan has been hesitant to certify getting rid of deflation, Shigeru Ishiba administration might declare it before the election of the House of Councillors in July.