Bank of Japan raises interest rate to highest level in 17 years

TOKYO: The Bank of Japan (BOJ) on Friday raised its policy interest rate to the highest level in 17 years, marking another step towards unwinding its long-standing ultra-loose monetary stimulus.

Following a two-day policy meeting, the BOJ decided to increase the policy rate, or the overnight call rate, to 0.5% from 0.25%, in line with market expectations. This is the third rate hike since the BOJ ended its negative interest rate policy in March 2024 and brings the policy rate to its highest level since October 2008.

The decision for the additional rate hike reflects continued improvements in economic and price conditions, as well as the expansion of wage increase initiatives in Japan, according to market analysts. Official data released on Friday showed Japan's core consumer price index (CPI), which excludes fresh foods, rose by 3.0% last month, making it necessary for the BOJ to curb the risk of inflation outpacing wage increases.

In the BOJ's Outlook for Economic Activity and Prices report, the year-on-year CPI growth forecast was revised upward to 2.4% for fiscal 2025 (from the previous 1.9%) and to 2.0% for fiscal 2026 (from 1.9%).

Despite the rate changes, the BOJ noted that real interest rates remain significantly negative and accommodative financial conditions will be maintained. If the economic and inflation outlook materialises, interest rates will continue to be raised accordingly, the BOJ added.

Based on reports from regional branches and surveys by economic organisations, the BOJ predicts that high levels of wage increases will continue across a wide range of industries, from large corporations to small and medium-sized enterprises, during the 2025 spring labour negotiations.

BOJ Governor Kazuo Ueda is scheduled to hold a press conference in the afternoon to elaborate on the reasons behind the decision and outline the future direction of monetary policy.

By RSS/Xinhua