- Japan’s central bank has raised its benchmark interest rate to 1.25 percent, its highest level in more than three decades, as rising prices and wages put pressure on policymakers to tighten monetary policy.
The Bank of Japan raised the rate by 25 basis points in a 7-2 vote, moving further away from the ultra-low rates that had supported the economy for years. The latest increase takes the policy rate to its highest level since 1995.
The move comes as Japan’s economy faces a different problem from the one that dominated much of the past three decades. The country had struggled with deflation and weak price growth, but inflation has become more persistent in recent years.
Underlying inflation is now moving closer to the Bank of Japan’s two percent target. Higher wages, energy costs and the weaker yen have contributed to rising prices, while companies have also become more willing to pass higher costs on to consumers.
Bank of Japan Governor Kazuo Ueda said the bank would continue to watch price and wage developments as it considers its next steps. He indicated that further rate increases would depend on how the economy and inflation develop.
Japan’s labour shortage is also adding to wage pressures. With the working-age population shrinking, companies are competing for workers and offering higher pay. Rising wages could support household spending, but they could also add to pressure on prices.
The higher interest rate could also affect the yen and financial markets as investors reassess the returns available on Japanese assets. Changes in Japanese rates can influence the flow of money between Japan and other major markets.
However, the Bank of Japan has not given a specific timetable for another rate increase. Its next decisions are expected to depend on inflation, wages, economic growth and financial conditions.
The latest hike marks another step away from Japan’s long period of near-zero interest rates. The central bank, which spent years trying to push prices higher, is now having to balance rising inflation against the risk that higher borrowing costs could slow economic activity.