The Bank of Japan raised its benchmark interest rate by 0.25 percentage points to 1.25% on Friday, taking borrowing costs to their highest level in 31 years as Japan faces rising inflation and wages.
The increase was the first since June and moves the policy rate closer to levels the central bank considers neutral for the economy.
Why the central bank acted
Japan’s inflation has been driven by rising energy prices, global supply pressures and domestic price growth above the Bank of Japan’s 2% target. Core consumer inflation remained near that target in August, while companies continued passing higher costs on to food and grocery prices.
BoJ Executive Director Koji Nakamura said the shrinking labour pool was lifting wages as part of a “slow-moving demographic shock”, a structural factor he said could not be dismissed as temporary.
Pressure from global rates and the yen
The Federal Reserve’s rate hike on Wednesday, along with the prospect of another increase later this year, has added pressure on the Bank of Japan to keep pace. A wider United States-Japan rate gap could weaken the yen and raise inflation through higher import costs, analysts told Reuters. Read the context: Yen reaches one-month high amid Bank of Japan rate speculation.
The Bank of Japan’s policy rate remains below the European Central Bank’s 2.5% key rate, which was raised last week. Markets will closely watch Governor Kazuo Ueda’s post-meeting briefing for indications of the timing and pace of further increases.
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