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Japan Monetary Policy January 2025

Japan: Bank of Japan hikes rates to highest level since 2008 in January

BOJ hikes, as expected: At its meeting on 22–24 January, the Bank of Japan (BOJ) raised its policy rate by 25 basis points to 0.50%, its highest level since 2008, meeting market expectations. The Bank also raised its inflation forecasts for the coming years.

Increases in core inflation and inflation expectations drive the move: In justifying its decision, the BOJ pointed to the recent increase in underlying inflation, which hit a 16-month high to move further above the Bank’s 2.0% target in December. In line with this, the BOJ raised its headline inflation forecasts for fiscal year (FY) 2024 by 0.2 percentage points to 2.7%, for FY 2025 by 0.5 percentage points to 2.4%, and for FY 2026 by 0.1 percentage point to 2.0%.

Moreover, the BOJ noted that global capital and financial markets have remained broadly stable since its last meeting in December, despite the threat posed to the world economy by U.S. tariffs under new President Trump. This meant that a hike was unlikely to cause jitters in the market for Japan’s public debt, which was 250% of GDP in 2023.

One more hike left this year: The BOJ’s forward guidance remained similar to December’s, stating that the Bank would continue to raise interest rates if its outlook for GDP growth and inflation is realized. At its next meeting on 18–19 March, the BOJ is expected to leave interest rates unchanged by virtually the entirety of our panel; in the spring, data for wages—a key driver of Japan’s recent exit from its decades-long deflation—will be published from the annual shunto negotiations between employers and unions. The BOJ is then expected to make another 25 basis point hike before the end of the year, likely in late Q2 or early Q3.

Panelist insight: Goldman Sachs analysts said:

“We caution that there is considerable uncertainty on the timing of the next rate hike. If the yen were to depreciate sharply and at a rapid pace as potential tariff rate hikes by the US become clearer, the BOJ may opt to bring forward the next rate hike. On the other hand, if the political situation in Japan were further destabilized in the wake of the Upper House elections to be held prior to the July MPM, the BOJ could delay the timing of the next rate hike.”

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