The Bank of Japan on Friday hiked interest rates by 25 basis points as expected and said that it was prepared to raise rates further if economic conditions improved and inflation remained heady.
The BOJ raised its short-term benchmark interest rate to 0.75% from 0.5%, putting the rate at its highest level since 1995. The hike is the BOJ’s second such move this year, after a 25 bps hike in January.
Friday’s decision was also unanimously approved by the BOJ’s rate-setting board.
The BOJ said it expects Japanese firms to continue raising wages steadily in 2026, while corporate profits are also expected to improve. Coupled with expectations for a tight labor market, the BOJ said it was “highly likely” that wages and inflation will increase moderately.
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Still, the central bank noted that real interest rates still remained “significantly negative,” and that financial conditions remained broadly accommodative to support the Japanese economy.
The BOJ said given that real interest rates were at low levels, it was prepared to raise interest rates and scale back monetary accommodation further if the Japanese economy improved in line with its expectations.
"The (BOJ) Board’s hawkish messaging suggests that the tightening cycle has further to run," Capital Economics analysts said in a mailed statement.
The added that incoming economic readings were more than likely to surprise to the upside, furthering the case for future monetary tightening by the central bank.
The BOJ sees core consumer price index inflation decelerating to below its 2% annual target through the first half of fiscal 2026, before picking up steadily after.
The central bank also expects Japan’s labor market to remain tight in the coming year.
Friday’s hike was widely expected by markets, with the BOJ seen raising rates to help curb sticky inflation and support a beleaguered yen.
The decision also came just hours after CPI data for November showed inflation remaining sticky, while underlying inflation remained well above the BOJ’s 2% annual target.
Focus is now squarely on a press conference by BOJ Governor Kazuo Ueda, scheduled for 15:30 JST (06:30 GMT), for more cues on the BOJ’s outlook.
Japanese stock markets slightly trimmed their intraday gains after the BOJ’s decision, with the Nikkei 225 trading up 1.1% by 22:50 ET.
The yen’s USD/JPY pair-- which gauges the amount of yen required to buy one dollar-- also trimmed some of its intraday gains, and was up 0.2% at 155.81 yen.
Source: Investing