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Informist, Friday, Jan. 24, 2025

MUMBAI/NEW DELHI - Bank of Japan Friday raised its benchmark short-term interest rate to "around 0.5%" from "around 0.25%" in an effort to adjust the degree of monetary policy accomodation. The central bank's board voted to increase rates with an eight-one majority.

"Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity," Bank of Japan said in a release.

Analysts had widely expected Japan's central bank to hike rates amid rising inflation. Data released just before the policy meeting showed core inflation in Japan rose to a 16-month high of 3.0% from 2.7% in November.

Further, the Japanese central bank showed confidence that CPI inflation was on its way up to its 2% target on a consistent basis on account of a continuous rise in wages. As per the median of the Bank of Japan policy board members' forecasts for the fiscal year ending March, CPI inflation excluding fresh food is expected to be around 2.7%, up 20 basis points from its previous estimate in October. The central bank also raised its estimate for core CPI to 2.4% for the year ending March 2026, up 50 bps from October's forecast, and to 2.0% for the year ending March 2027. 

The central bank, in its report titled "Outlook for Economic Activity and Prices (January 2025)", said the increase in year-on-year CPI inflation rate, which excludes fresh food, was higher in the year ending March 2025 and March 2026 due to a rise in rice prices and higher import costs on account of the recent depreciation in the Japanese yen. 

"...With a growing sense of labour shortage, underlying CPI inflation is expected to increase gradually, mainly reflecting the improvement in the output gap and the rise in medium- to long-term inflation expectations," the bank said in its report. "In the second half of the projection period, underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target."

The central bank expects real GDP growth in the year ending March 2025 to be 0.5%, down 10 bps from October's estimate. The GDP growth forecast remained unchanged at 1.1% for the year ending March 2026 and 1.0% for the subsequent year, as per the median forecasts of the Bank of Japan's policy board members. 

As for the future course of policy, Bank of Japan expects to continue raising rates, should economic developments align with its expectations. On the conduct of monetary policy, it said, "While it will depend on developments in economic activity and prices as well as financial conditions going forward, given that real interest rates are at significantly low levels, if the aforementioned outlook for economic activity and prices will be realised, the bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation." 

"The next policy rate hike, to 0.75%, would be in September, once the Bank of Japan confirms wage growth is consistent with annual wage negotiations and the trend of seasonal bonuses," S&P Global Market Intelligence said in a report. It expects an additional rate hike in 2026, and said that continuous policy rate hikes could weaken economic activity, "as rising cost pressures may lead to an increase in bankruptcies, while higher loan rates could suppress both residential and fixed investment".

According to the S&P Global Market Intelligence report, uncertainty around US economic policy remains the major risk to the outlook of the Japanese central bank's monetary policy. It said, "Increased trade barriers could constrain global trade, potentially leading to a decline in corporate profits and limiting domestic investment and wage growth. Market participants' risk averse behaviour in response to concerns about increased protectionism could lead to safe-haven yen appreciation, which may help ease inflation. In this scenario, the Bank of Japan could delay its policy rate hikes."  End

US$1 = INR 86.24

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Aaryan Khanna and Sourabh Kumar

Edited by Avishek Dutta

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