The Bank of Japan (BoJ) raised its key short-term interest rate by 25 basis points to 0.5% on Friday, reaching its highest level in 17 years.
The decision aligns with market expectations and reflects ongoing wage growth and steady inflation progress. This marks the BoJ’s third rate hike since ending its negative interest rate policy in March 2024.
The central bank signalled the possibility of further rate increases and a gradual reduction of monetary support, contingent on economic and inflation trends matching its forecasts. The decision was passed by an 8-1 vote, with board member Nakamura dissenting.
In its latest quarterly outlook, the BoJ revised its core inflation forecast for FY 2024 to 2.7%, up from the 2.5% estimate in October, citing a worsening labour shortage as a contributing factor.
Inflation is expected to ease to 2.4% in FY 2025 and return to the target level of 2.0% in FY 2026. Meanwhile, the central bank slightly lowered its GDP growth projection for 2024 to 0.5% from 0.6%, maintaining forecasts of 1.1% growth for FY 2025 and 1.0% for FY 2026.
This rate adjustment follows increasing signals from BoJ officials suggesting a hike was imminent.
Economists had warned that further delays could weaken the yen against the dollar. Hideo Kumano, chief economist at Dai-ichi Life Research Institute, noted that without this move, the yen risked a sharp depreciation.
The Bank of Japan’s decision reflects a delicate balancing act between stabilising the domestic economy and addressing global uncertainties, including currency pressures.
