Bank of Japan Governor Kazuo Ueda answers questions during a Governors Talk on Japanese Inflation and Monetary Policy at the International Monetary Fund (IMF) and World Bank Group 2024 Fall Meeting in Washington, U.S., 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 its highest level since 2008, as it seeks to normalize its monetary policy amid signs of steady inflation and rising interest rates. wages.
The measure comes in line with expectations from a CNBC poll, where an overwhelming majority of economists predicted an increase.
The BOJ disclosed in its statement that the decision was an 8-1 split, with board member Toyoaki Nakamura opposing the rate hike.
Nakamura said the central bank should only loosen policy after confirming an increase in firm earnings strength from reports that would be out of the next monetary policy meeting.
Following the decision, You are Japanese strengthened 0.3% to trade at 155.61 against the dollar, while the country’s benchmark Nikkei 225 The stock index rose 0.33%.
The yield on 10-year Japanese government bonds climbed 1.7 basis points to 1.222%.
The Bank of Japan has long stated that a “virtuous cycle between wages and prices” where higher wages fuel price increases were necessary for it to raise rates.
Before the meeting, senior BOJ officials, including Governor Kazuo Ueda and Deputy Governor Ryozo Himino, had signaled the central bank’s willingness to raise rates.
Salaries in focus
The BOJ will closely watch the Shunto wage negotiations and hopes to see “strong wage growth” in fiscal year 2025, Himino said in a speech to business leaders on Jan. 14.
In its statement on Friday, the Central Bank noted that there were “many views expressed by firms that they will continue to raise wages steadily in this year’s annual spring labor-management negotiations, after solid wage growth last year,” due to improved corporate earnings and a tight labor market.
Japan Confederation of Trade Unions head Rengo said annual wage growth this year should exceed the 5.1% achieved 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 is targeting increases of at least 6% for smaller firms to narrow the income gap with workers in larger companies.
The BOJ pointed out that with wages continuing to rise, core inflation had gradually increased to 2%.
CPI numbers released early Friday showed headline inflation hit its highest since January 2023 at 3.6%, year-on-year, in December. Core inflation rose to a 16-month high of 3%.
The BOJ forecast that the headline inflation rate is likely to be around 2.5% for its fiscal year ending March 2026, due factors such as higher import prices stemming from the yen’s depreciation.
More rate hikes?
In a Jan. 21 note, Vincent Chung, co-portfolio manager for diversified income bond strategy at T. Rowe Price, said that going forward, a rate hike would 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 even 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 “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 yen’s volatility has been significant, any significant intervention in the currency, similar to last year, appears unlikely.
Last July, the yen hit its weakest level against the dollar since 1986, hitting 161.96. Japanese authorities later confirmed that they spent 5.53 trillion yen, or $36.8 billion, to shore up the yen in July.
Japan spent over 15.32 trillion yen ($97.06 billion) to boost the currency through 2024.
Chung said US inflation could pick up later this quarter, and coupled with steady economic growth, that could put upward pressure on yields, which could strengthen the dollar – weakening the yen.
“Investors should also consider that with possible major policy changes on trade and the Fed approaching a pause, the downside risk to growth is likely to be greater this year than in 2024. As a result, we we expect realized volatility in USD/JPY to remain high in 2025,” he said.