Japan’s central bank has hiked interest rates as expected to a 17-year high as it continues on a path to normalise its monetary policy.

On Friday (Jan 24), the Bank of Japan (BOJ) raised short-term rates by 25 basis points to 0.5 per cent, its highest level since the 2008 global financial crisis.

This marks its third increase since it ended its negative interest rate policy in March last year.

BOJ governor Kazuo Ueda said there is no change to the central bank’s view of raising policy rate and adjusting the degree of monetary support if the economy and prices move in line with forecasts.

MORE RATE HIKES EXPECTED

Economists said the rate increase shows the BOJ is confident about Japan’s economic growth trajectory, and expect continued hikes through the year.

Martin Schulz, chief policy economist at tech firm Fujitsu, said he expects the central bank to move cautiously towards 1 per cent.

Jesper Koll, expert director of financial services company Monex Group, said he expects the policy rate to be at 1.25 per cent by the end of 2025.

“Price power is coming to Japan. Demand-pull inflation is there, and as a result, that’s a green signal for the BOJ,” he told CNA’s Asia Now.

“As the economy continues to show good, continued momentum towards a 1.5 to 2 per cent growth in Japan, the BOJ is going to regularly increase and normalise the interest rate structure.”

They said Japan needs to normalise policy rates as its ultra-low near-zero levels leave little room for additional easing.

The gap between interest rates in Japan and abroad was also seen as too high, keeping the yen weak. 

“Many investors, in particular bigger industries and those depending on imports, are saying the Japanese yen is way too weak,” said Schulz.

“Plus, there are risks now as the US dollar strengthens even more and that this gap is increasing. So, the BOJ needs to move. The economy is stable enough to take it. Interest rates will be gradually higher.”

He added that the move has been welcomed by most investors. 

DOMESTIC DEMAND

Schulz said that while he is not optimistic on the yen’s recovery as the US dollar continues to strengthen, a weaker yen will allow Japanese firms to remain competitive as they invest in the US.

Still, observers expect economic activities to be driven domestically this year.

This comes as economies brace for potential market disruptions following newly inaugurated United States President Donald Trump’s threats of slapping tariffs on imports.

“We should expect trouble from tariffs with the US … it will affect supply chains in Asia …  so there will be little support from the external side,” said Schulz.

“It will certainly affect Japan as well. So, the focus is keeping the domestic economy as strong as possible.”

Jun Saito, a senior research fellow at the Japan Center for Economic Research, said: “Japan still depends a lot on the export sector. A stronger yen … and tariffs … will affect the sector … leading to a negative risk on the future trend of the Japanese economy.”

There are expectations of higher wages this year, which will boost household consumption.

However, if interest rate hikes lead to the appreciation of the yen, it will negatively impact Japan’s export economy as products will be more expensive for foreign buyers.

This will in turn make it difficult for wage increases to take place, potentially affecting support for the domestic economy, said Saito.

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