The Bank of Japan (BOJ) has made a significant move by raising interest rates for the first time in nearly a decade. This decision aims to normalize the central bank's monetary policy and combat rising inflation. The move was approved by a majority of the board, but one member dissented. Experts predict further gradual hikes in the coming months.
The Bank of Japan (BOJ) raised interest rates by 25 basis points on Friday, marking a significant shift in its monetary policy . The move brings the policy rate to 0.5%, the highest level since 2008. This decision, which was approved by an 8-1 vote with board member Toyoaki Nakamura dissenting, reflects the BOJ's aim to normalize its monetary policy stance.
Nakamura argued for maintaining the status quo, emphasizing the need for concrete evidence of rising corporate earnings before implementing policy changes. He suggested that such data would become available by the time of the next monetary policy meeting. However, senior BOJ officials, including Governor Kazuo Ueda and Deputy Governor Ryozo Himino, had previously signaled the central bank's inclination towards a rate hike. Himino, in a speech to business leaders on January 14th, highlighted the BOJ's keen interest in the upcoming 'shunto' wage negotiations and expressed a desire to witness substantial wage increases in the 2025 fiscal year. Vincent Chung, co-portfolio manager for diversified income bond strategy at T. Rowe Price, anticipates a series of gradual rate hikes following the initial 25 basis point increase. In a January 21st note, Chung projected that the policy rate could potentially reach 1% by the end of the year. He further suggested that the rate could even surpass 1% as it aligns with the lower end of the BOJ's neutral rate range. Chung acknowledges the volatility experienced by the Japanese yen but believes that large-scale currency interventions similar to last year are improbable. He also warns of potential upward pressure on yields due to rising inflation in the United States and sustained economic growth, which could strengthen the dollar and consequently weaken the yen. Chung emphasizes the heightened two-sided risk to growth in 2025 compared to 2024, citing potential major policy shifts in trade and the Federal Reserve nearing a pause. Consequently, he predicts sustained high volatility in the USD/JPY exchange rate throughout 2025.
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