The Bank of Japan has raised short-term interest rates to "around 0.5%," the highest level in 17 years, a move consistent with continued efforts to "normalize" monetary policy.
The central bank's decision came in an 8-1 vote to raise the policy rate to its highest level since the 2008 global financial crisis. The move follows weeks of speculation over whether Gov. Kazuo Ueda will wait for stronger evidence of rising wages and sustainable inflation in Japan.
Japan's economic activity and prices are moving in line with the central bank's outlook, the BoJ said in an accompanying statement on Friday. "The likelihood of realizing the prospect has been rising," it said.
The yen has been rising against the dollar in the weeks ahead of the Post's two-day policy meeting, trading around 0.6% higher at 155.15 yen following the announcement. Investors are betting that UEDA could rise with additional rates in July as it seeks to avoid a departure from decades of super-customary policy.
Shed said that because real interest rates remained at very low levels, it would continue to raise policy rates if economic activity and price growth could reach the levels of its outlook.
But currency traders said the moves remained cautious and they were "ready to go" when Ueda held a press conference later in the afternoon. Over the past few months, UEDA’s comments have caused confusion and triggered sharp currency moves.
The BOJ's previous growth in July surprised most analysts, triggering a phase of extreme volatility in the yen and a one-day "flash crash" in Japanese stocks, which recovered shortly thereafter.
Hours before the PO Box announcement, official data showed Japan's core consumer prices rose 3% from a year earlier. The increase was partly driven by cuts to government energy subsidies and marked the fastest annual inflation rate in 16 months.
The central bank's stable inflation rate is around 2%. It said in its outlook statement that it foresees fresh food sales excluding fresh food products in fiscal 2025. The BOJ highlighted rising rice prices as a possible factor in inflation.
The central bank again warned that its decisions require "appropriate attention" to financial and foreign exchange markets.
"With company behavior recently shifting towards higher wages and prices, exchange rate developments are more likely to affect prices than in the past," it said.
The shed decision casts a shadow over Donald Trump's return to the US presidency this week.
Analysts have warned that while Japan's wage and price growth is enough to justify higher interest rates, Shack suggests it will have to delay any move if incoming presidential comments or executive orders shock markets into turmoil.