The Bank of Japan (BOJ) raised its policy rate by 25 basis points to 0.5% on Friday, marking its first rate increase since 2008. This move comes as the central bank looks to normalize monetary policy, responding to improving economic conditions in Japan.

Key Points:

• The tightening decision passed with an 8-1 vote, with Toyoaki Nakamura voting against the increase.
• The policy rate is now at its highest level since 2008.
• The BOJ signaled that it may implement gradual rate hikes through 2025.
• Wage negotiations are a critical factor for future policy decisions.

This decision follows extensive interventions in the currency markets over the past year, where Japanese authorities spent over 15.32 trillion yen to stabilize the yen. With the yen continuing to weaken, Japanese officials seem to be shifting focus to monetary policy normalization as a means of restoring currency stability.

Toyoaki Nakamura was the sole dissenting vote, suggesting that the central bank should only change its money market guidelines after confirming that companies’ earnings potential has increased.

Link to Official Bank of Japan Monetary Policy Decision (January 2025)

In addition to the rate hike, the BOJ published an updated Monetary Policy Outlook, which includes revised growth and inflation projections:

• The median core CPI forecast for fiscal 2025 is +2.4%, up from +1.9% in October.
• The median core CPI forecast for the next year is +2.0%, up from +1.9% in October.

At the press conference, Governor Ueda emphasized that future policy changes would primarily depend on inflationary pressures rather than economic growth. He acknowledged that while the risk of deflation remains, real wages are expected to rise following the upcoming “shunto” wage negotiations.

After the rate hike announcement, the Japanese yen, which had been showing slight weakness, strengthened, leading to a 0.3% drop in USD/JPY to 155.61. The yen rallied against most major currencies but lost some of its gains after the press conference. Despite this, it managed to maintain strength against the Swiss franc (0.17%) and British pound (0.12%), while losing ground against the Australian dollar (-0.11%) and New Zealand dollar (-0.21%).