San Francisco Frontiers - Bank of Japan hikes interest rate to 17-year high, boosts yen

The well-flagged 25-basis-point rise to 0.5 percent comes as data indicates the Japanese economy is developing in line with BoJ expectations and follows another bumper inflation reading.

The move, which leaves borrowing costs at the highest since 2008, was also underpinned by "steadily" rising wages and financial markets being "stable on the whole", the BoJ said in a statement.

"Japan's economic activity and prices have been developing generally in line with the Bank's outlook, and the likelihood of realising the outlook has been rising," it said.

If its outlook is met, "the bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation", it added.

BoJ chief Kazuo Ueda told a news conference that the pace and timing of future hikes was yet to be determined.

"We would like to make a decision after we have studied the impact of this rate hike," he said.

The hawkish comments sent the yen up as much as 0.7 percent against the dollar to 154.84 yen.

Even as other central banks have raised borrowing costs in recent years -- and started cutting again in 2024 -- the BoJ has remained an outlier.

But it concluded last March that Japan's "lost decades" of economic stagnation and static or falling prices were over, finally lifting rates above zero.

That increase was followed by another in July that caught investors off guard and sparked turmoil in global equity and currency markets.

This time Ueda prepared markets for an increase -- some 75 percent of economists expected one -- and the reaction was more muted on Friday.

- Trump tariffs -

"With no market turbulence after (US President Donald) Trump's inauguration," conditions for the BoJ to hike its policy rate have been met, Ko Nakayama, chief economist of Okasan Securities Research, said before the announcement.

"Raising just 25 basis points to 0.5 percent won't cool the economy."

There are, however, concerns among Japanese companies that Trump could impose huge tariffs on imports from key trading partners, which many economists warn could drive up inflation.

Japan's economic growth slowed in the July-September quarter, partly because of one of the fiercest typhoons in decades and warnings of a major earthquake, which did not materialise.

"The Bank of Japan is dialling back monetary policy support despite the poor run of economic data. The weak yen is a key reason," Moody's Analytics said in a note.

Data released Friday showed that headline Japanese inflation hit 3.6 percent in December, or 3.0 percent adjusted for food prices, up from 2.7 percent in November.

The core reading remained above the BoJ's two-percent inflation target, which it has surpassed every month since April 2022.

The BoJ on Friday also raised its inflation forecast for fiscal 2024 -- running to March 31, 2025 -- to 2.7 percent from 2.5 percent previously.

For fiscal 2025 it now expects inflation of 2.4 percent and 2.0 percent in 2026 -- both up from 1.9 percent previously forecast.

Marcel Thieliant at Capital Economics said inflation was set to remain above the BoJ's objective "for a while yet".

As a result "we're sticking to our forecast that the policy rate will reach an above-consensus 1.25 percent by the end of next year", Thieliant said before Friday's announcement.

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Z.Sanchez--SFF