Editorial Board, The Sankei Shimbun 
Governor Kazuo Ueda explains the BoJ's decision to raise interest rates at a press conference after the bank's monetary policy meeting on January 24. (©Sankei by Yoshinori Saito)
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The Bank of Japan (BoJ) has cautiously yet steadily revised its monetary policy. At its January 24 meeting, the central bank decided to raise the policy interest rate from about 0.25% to about 0.5%.
This is the third interest rate hike since the BoJ reversed its quantitative easing policy in the spring of 2024. Japan's interest rates are now at their highest level in around 17 years.
The bank believes wage hikes will continue in this spring's shunto labor negotiations. Also, there has been no major turmoil in international financial markets since the inauguration of the Trump administration. It therefore judged it appropriate to go ahead with the interest rate hike it had postponed in its December 2024 meeting.
Watchful of Interest Rate Impacts
Interest rates can have a wide-ranging impact on daily life and business activity. Raising them abruptly could have a chilling effect on the economy. The current decision to modify monetary policy while considering this point seems appropriate.
In the future, BoJ will undoubtedly consider further rate hikes. Japan's economy is at a crossroads and the near future will determine whether it can escape from its prolonged slump. Hopefully, the bank's implementation of policies will be detailed and prudent, without disrupting the trend toward recovery.
This interest rate hike comes in response to the risk of rising inflation. The BoJ has revised upward its price forecasts from October 2024, changing its prediction for the FY2025 consumer price inflation rate from 1.9% to 2.4%. Rising import prices due to the weak yen and increasing rice prices are factors in their estimate.
Wages Must Keep Up with Rising Prices
If wage hikes at small and medium-sized enterprises do not spread as expected, and wage increases cannot keep up with rising prices, personal consumption will likely remain stagnant. Therefore, BoJ should proceed with extreme caution.
We must also assess the policies adopted by the Trump administration. Some are concerned that US President Donald Trump's proposed high tariffs and tax cuts could accelerate inflation. As the new administration's policies take shape, interest rates and exchange rates in the United States and other countries could fluctuate significantly.
BoJ needs to carefully examine the impacts of its interest rate hike. At the same time, it must consider how to quickly respond to future changes in the domestic and international economic and financial environments.
Market interest is focused on when the next interest rate hike will occur. If the policy interest rate is raised to 0.75%, it will be at the highest level in about three decades. This would create a situation not seen in Japan for a long time. Such policy changes demand careful consideration.
Before the January 23 meeting, Governor Kazuo Ueda and other BoJ officials had hinted at the possibility of further interest rate hikes. As a result, the market had priced in the rate hike and no unexpected disruptions occurred. Hopefully, the BoJ will continue to engage in discreet dialogue with the market.
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Author: Editorial Board, The Sankei Shimbun
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