Bank of Japan raises policy rate by 25 basis points to highest level since 2008

The Bank of Japan raised interest rates by 25 basis points to 0.5% on Friday, taking its policy rate to the highest level since 2008 as it seeks to normalize monetary policy.

The move was in line with expectations in a CNBC survey from January 15 to 20, in which the vast majority of economists predicted a rate hike.

The decision was split 8-1, with board member Toyoaki Nakamura dissenting, the Bank of Japan revealed in a statement.

Nakamura said the central bank should change policy only after confirming improvements in corporate profitability in a report released at the next monetary policy meeting.

After making this decision, yen It rose 0.3% against the dollar to 155.61, while the country's benchmark rose 0.3% to 155.61 Nikkei 225 Index The stock index rose 0.33%.

Japan's 10-year government bond yield rose 1.7 basis points to 1.222%.

Senior Bank of Japan officials, including Governor Kazuo Ueda and Deputy Governor Ryozo Himino, have said the central bank is willing to raise interest rates.

Speaking to business leaders on January 14, Jimino said the Bank of Japan would pay close attention to the “Spring Knife” wage negotiations and hoped to see “strong wage increases” in fiscal 2025.

Going forward, the rate hikes will be followed by “a series of gradual increases that will likely result in higher policy rates,” Vincent Chung, co-portfolio manager of T. Rowe Price's diversified income bond strategy, said in a Jan. 21 note. It will reach 1% by the end of the year. “

He added that the policy rate could even exceed 1% as that is closer to the lower end of the BOJ's neutral interest rate range.

In September, Bank of Japan board member Naoki Tamura said the neutral rate was “at least around 1%,” although the Bank of Japan has no official neutral rate forecast.

Chung noted that while Japanese officials say the yen is volatile, large-scale currency intervention like last year's seems unlikely.

Last July, the yen hit its lowest level since 1986, reaching 161.96 against the dollar. Japanese authorities later confirmed that they spent 5.53 trillion yen (approximately $36.8 billion) in July to support the yen.

In 2024, Japan spent more than 15.32 trillion yen ($97.06 billion) to support the yen exchange rate.

Chung said U.S. inflation is likely to rise later in the quarter, which, coupled with continued economic growth, could put upward pressure on yields, which could strengthen the dollar and weaken the yen.

“Investors should also consider that with potential major policy shifts on trade and the Fed approaching a pause, risks to growth in both directions are likely to be greater this year than in 2024. As a result, we expect realized volatility in USD/JPY to be higher in 2024 Stay at a high level in 2025,” he said.