The Bank of Japan (BOJ) has made its most aggressive monetary policy decision in over a decade, raising interest rates by 25 basis points to 0.5% on Jan. 24.
This is the first time rates have reached this level since 2008, as the central bank responds to persistent inflation and a rise in wages. The decision reportedly followed weeks of speculation and came with an 8-1 split among board members.
Governor Kazuo Ueda, along with Deputy Governor Ryozo Himino, had hinted at this decision many times in earlier public comments, pointing to the need to adapt monetary policy to changing conditions, mainly thanks to US president Donald Trump.
Per the BOJ’s official statement, board member Toyoaki Nakamura was the sole dissenter, arguing that the BOJ should hold off on a rate hike until more data on corporate earnings becomes available at the next meeting.
Yen strengthens and bond yields rise
Japan’s financial markets reacted immediately. The yen gained 0.6% against the U.S. dollar, trading at 155.12 as of press time. The country’s Nikkei 225 stock index saw a modest rise, while the yield on 10-year Japanese government bonds ticked up by 2.5 basis points, hitting 1.23%.
For years, the central bank has maintained that raising rates would require a “virtuous cycle” where wage growth fuels inflation. Recent data suggests that cycle may now be in motion.
The BOJ has set its sights on Japan’s annual “shunto” wage negotiations, which play a critical role in determining salary increases nationwide.
In its official statement, the BOJ claims that many companies have expressed intentions to steadily raise wages during this year’s negotiations, citing improved corporate profits and tight labor conditions.
The Japanese Trade Union Confederation (Rengo), in particular, has set its expectations high. Rengo President Tomoko Yoshino stated that pay increases this year must exceed the 5.1% average from 2024. Smaller companies, often left behind in wage growth, are being urged to increase salaries by at least 6%.
Consumer inflation data released on Friday reinforced the urgency behind these demands. Japan’s headline inflation climbed to 3.6% in December, the highest level recorded since January 2023, while core inflation hit a 16-month high of 3%.
These figures far exceed the BOJ’s 2% target, and they also mean that the cost of living continues to rise for Japanese households, according to the official statement.
The BOJ’s forecast for inflation in the coming years remains cautious but optimistic. The central bank expects inflation to settle around 2.5% by March 2026, with yen depreciation and higher import costs being key contributors to this outlook.
More rate hikes are coming
Friday’s hike may not be the last. Analysts are already speculating about further tightening of monetary policy. Vincent Chung, a portfolio manager at T. Rowe Price reportedly said that he expects a gradual series of hikes throughout the year.
“We could see the policy rate hit 1% by December,” he said, adding that the BOJ’s neutral rate likely falls within that range.
Chung also pointed out that while the yen has faced significant volatility, Japan is unlikely to intervene in the currency market as aggressively as it did last year. In July 2024, the yen hit its weakest level against the dollar since 1986, trading at 161.96.
To stabilize the currency, Japanese authorities spent 15.32 trillion yen ($97 billion) over the course of the year, including a massive 5.53 trillion yen intervention in July alone.
Despite recent gains, risks remain for the yen. Chung warned that rising inflation in the U.S. and the return of Trump could drive up yields there, strengthening the dollar and putting renewed pressure on the yen. “The realized volatility in USD/JPY is likely to remain high this year,” he said.
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