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Bank of Japan Governor Kazuo Ueda answers questions during a governors’ conversation on inflation and Japanese monetary policy at the International Monetary Fund (IMF) and World Bank Group 2024 Fall Meeting in Washington , United States, on October 23, 2024.
Kaylee Greenlee Beal | Reuters
The Bank of Japan raised rates by 25 basis points on Friday to 0.5%, taking its policy rate to the highest level since 2008, as it seeks to normalize its monetary policy amid signs of inflation sustained and rising wages.
The move comes in line with expectations from the CNBC survey, where a most economists predicted an increase.
The BOJ in his statement revealed that the decision was split 8-1, with council member Toyoaki Nakamura dissenting over the rate hike.
Nakamura said the central bank should only adjust policy after confirming an increase in corporate earnings from reports that will be out by the next monetary policy meeting.
After the decision, the Japanese yen strengthened 0.6% to trade at 155.12 against the dollar, while the country’s benchmark Nikkei 225 The stock index rose slightly.
The yield on 10-year Japanese government bonds climbed 2.5 basis points to 1.23%.
The Bank of Japan has long argued that a “virtuous cycle” where higher wages fuel rising prices was necessary to raise rates.
Before the meeting, senior BOJ officials, including Governor Kazuo Ueda and Deputy Governor Ryozo Himino, had indicated the central bank’s willingness to raise rates.
Salaries in focus
The BOJ will closely monitor the “shunto” wage negotiations, and hopes to see “strong wage increases” in fiscal year 2025, Himino said in a speech to business leaders on January 14.
In its statement on Friday, the central bank noted that there were “many views expressed by companies that say they will continue to increase wages steadily in this year’s annual labor management wage negotiations.” year, after the solid salary increase last year”, due to the improvement. corporate profits and a tight labor market.
The head of the Japanese Trade Union Confederation – Rengo – said that the annual wage increase this year should exceed the 5.1% secured last year because real wages continue to fall, Reuters reported.
President Tomoko Yoshino said Rengo was formally seeking wage increases of at least 5% in this year’s “shunto” wage negotiations, and aimed for increases of at least 6% for smaller firms to narrow the gap income with workers in large companies.
BOJ indicated that with wages continuing to rise, underlying inflation had gradually increased towards 2%.
CPI numbers released earlier on Friday showed that general inflation reached its highest since January 2023 at 3.6%, year on year, in December. Core inflation rose to a 16-month high of 3%.
BOJ predicts that the general inflation rate was likely to be around 2.5% for its fiscal year ending in March 2026, due factors such as higher import prices stemming from the depreciation of the yen.
More rate hikes?
In a note on Jan. 21, Vincent Chung, co-portfolio manager for the diversified income bond strategy at T. Rowe Price, said that going forward, a rate hike will be followed by “a series of gradual increases , potentially bringing the policy rate to 1% by the end of the year.”
He added that the policy rate could also exceed 1%, as this is closer to the lower end of the BOJ’s neutral rate range.
In September, BOJ board member Naoki Tamura said the neutral rate “it would be at least around 1 percent,” although the BOJ does not have an official neutral rate forecast.
Chung noted that while Japanese officials have indicated that the volatility of the yen has been significant, any substantial currency intervention similar to last year seems unlikely.
Last July, the yen It hit its weakest level against the dollar since 1986reaching 161.96. Japanese authorities later confirmed that they spent 5.53 trillion yenor $36.8 billion, to enrich the yen in July.
Japan spent more than 15.32 trillion yen ($97.06 billion) to strengthen the currency in 2024.
Chung said U.S. inflation could rise later this quarter, and coupled with sustained economic growth, this could put upward pressure on yields, which could strengthen the dollar – weakening the yen.
“Investors should also consider that with potential major policy changes on trade and the Fed close to a break, the two-sided risk to growth is likely to be greater this year than in 2024. Consequently, we expect that realized volatility in USD/JPY remains high in 2025,” he said.
