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Bank of Japan hikes benchmark rate to 0.75%
The Bank of Japan (BOJ) increased its main interest rate by a quarter percentage point on Friday, bringing it to approximately 0.75%-the highest level in three decades. The decision, led by Governor Kazuo Ueda, marks the first rate hike since January and the first under both Ueda and new Prime Minister Sanae Takaichi.
Inflation and political pressures drive move
Japan's inflation, excluding volatile food and fuel prices, rose 3% in November, remaining above the BOJ's 2% target. The weak yen has exacerbated import costs, fueling price increases. While higher rates could strengthen the currency and ease inflation, they also raise government borrowing costs-a concern for Takaichi, who previously called rate hikes "stupid" but has since prioritized combating inflation to shore up support for her Liberal Democratic Party (LDP).
Limited immediate impact expected
Analysts suggest the rate hike may have little immediate effect on inflation, as markets have already priced in the move. Shoki Omori, chief strategist at Mizuho in Tokyo, told the BBC the yen's persistent weakness limits the policy's impact. Most economists anticipate one more rate increase in 2025, potentially bringing the benchmark to 1%.
Historic shift in monetary policy
The BOJ's decision reflects a dramatic departure from nearly 30 years of ultra-low rates. Julia Lee of Pacific FTSE Russell, part of the London Stock Exchange Group, called it a "historic shift." However, Oxford Economics' Shigeto Nagai warned that Takaichi's stance could complicate further hikes, noting the BOJ may wait six months to assess the economy's response before acting again.
Global central banks diverge on rates
Japan's move contrasts with recent actions by other major central banks. On Thursday, the Bank of England cut its main rate to 3.75%, the lowest since February 2023. Last week, the U.S. Federal Reserve reduced rates for the third time this year, setting its benchmark between 3.5% and 3.75%, despite internal divisions over future cuts.
"The BoJ will need time to monitor the impact of the rate hike on the real economy before its final move."
Shigeto Nagai, Oxford Economics
