Bank of Japan Governor Kazuo Ueda answers questions during a conversation on Japanese inflation and monetary policy at the International Monetary Fund (IMF) and World Bank Group 2024 Fall Meeting in Washington, United States, October 23, 2024.
Kaylee Greenlee Beal | Reuters
The Bank of Japan raised 25 basis points to 0.5% on Friday, bringing its policy rate to the highest level since 2008, as it seeks to normalize monetary policy amid signs of sustained inflation and rising wages.
The move is in line with expectations from the CNBC survey, where an overwhelming majority of economists predicted a hike.
The boj in his statement revealed that the decision was an 8-1 split, with board member Toyoaki Nakamura dissenting on the increase rates.
Nakamura said the central bank should only change policy after confirming an increase in corporate earning power from reports to be released 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 increased slightly.
The yield on 10-year Japanese government bonds rose 2.5 basis points to 1.23%.
The Bank of Japan has long declared a “virtuous cycle” where higher wages combine with price growth to raise rates.
Before the meeting, top BOJ officials, including Governor Kazuo Ueda and Vice Governor Ryozo Himino, had indicated the central bank’s willingness to raise rates.
Focus salaries
The BOJ will closely monitor the “Shunto” wage negotiations and hopes to see “high wage hikes” in fiscal 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 opinions expressed by companies stating that they will continue to increase the salary regularly during this year’s spring labor management annual salary negotiations , following strong wage increases last year, due to improving corporate profits and a tight labor market.
The head of the Japanese Trade Union Confederation – Rengo – said annual wage increases this year must exceed the 5.1% guaranteed last year because real wages continue to fall, Reuters reported.
President Tomoko Yoshino said Rengo is officially seeking wage increases of at least 5 percent in this year’s “Shunto” wage negotiations and is targeting hikes of at least 6 percent for small businesses to reduce the income gap with workers in larger companies.
Boj pointed out that with wages continuing to rise, core inflation had gradually increased towards 2%.
CPI figures released earlier on Friday showed headline inflation rose to its highest level since January 2023 at 3.6%, year-on-year, in December. Core inflation hit a 16-month high of 3%.
Boj forecasts that the inflation rate will tit was probably around 2.5% For its fiscal year ending March 2026, factors due to higher import prices resulting from the depreciation of the yen.
More rate hikes?
In a Jan. 21 note, Vincent Chung, co-portfolio director for a diversified income surety strategy at T. Rowe Price, said that moving forward, a rate increase will be followed by a “series of gradual increases, which potentially brought 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 says the neutral rate “It would be at least around 1%,” although Boj does not have an official forecast of the neutral rate.
Chung noted that while Japanese officials have indicated that volatility in the yen is significant, any substantial currency intervention similar to last year appears unlikely.
Last July, the yen hit its weakest level against the dollar since 1986, reaching 161.96. Japanese authorities later confirmed that they had 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 consolidate the currency during 2024.
Chung said U.S. inflation could rise later this quarter and coupled with sustained economic growth could put upward pressure on yields, which could strengthen the dollar – weakening the yen.
“Investors should also consider that with potential major policy changes in trade and the Fed approaching a pause, bilateral risk to growth is likely higher this year than in 2024. Therefore, we expect this that realized volatility in USD/JPY remains high in 2025,” he said.
