BOJ Raises Interest Rate to 0.25%, Signaling Confidence in Economy

At its monetary policy meeting on July 31, the Bank of Japan (BOJ) decided to raise its short-term interest rate target to 0.25% and reduce its purchase amount of Japanese government bonds.

The BOJ assessed that the risk of cooling down the economy from these measures would be minimal. Factors considered included widespread wage increases, fixed-rate tax cuts that started in June, and summer bonuses expected to boost consumer spending.

The BOJ plans to continue monitoring economic conditions and prices closely. It will consider further interest rate hikes after its next meeting in September.

Impact of Wage Hikes

In a June press conference, BOJ Governor Kazuo Ueda indicated that the bank might raise interest rates in July based on economic and price data. Inside the BOJ, it was noted that the inflation rate outlook through fiscal 2026 was progressing as expected, with a belief that "additional rate hikes can be implemented at any time." The bank assessed that the risk of reduced consumption from modest rate hikes was low.

Another consideration for an additional rate hike was the spread of wage increases following the 2024 spring labor negotiations. According to the final aggregate results from the Japanese Trade Union Confederation (RENGO), the average wage increase, combining base salary hikes and regular raises, reached 5.1%. This is the highest level in 33 years, up 1.52% from 2023.

BOJ'S Confidence in Consumer Spending

In its regional economic report (Sakura report) published on July 8, the BOJ observed that wage increases were also spreading to small and medium-sized enterprises in local areas. It generally takes time for these wage increases to be reflected in the data. Real wages, adjusted for price changes, are expected to shift from negative to positive from summer to autumn.

Despite weak consumer spending due to inflation and real GDP falling for four consecutive quarters up to the January–March period in 2024, BOJ officials are confident that "consumer spending has bottomed out, and if wages continue to rise, it will not collapse."

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(Read the article in Japanese.)

Author: Takafumi Uno, The Sankei Shimbun