The Bank of Japan has raised interest rates from 1% to 1.25%, taking borrowing costs to their highest level in 31 years as inflation and wages continue to rise.
The quarter-point increase, announced on Friday, was the first since June and moves monetary policy further away from the ultra-low rates that had helped establish the yen as a cheap global funding currency.
The central bank said the move would help counter inflation risks and bring rates closer to levels it considers neutral for the economy.
Japan is facing persistent price pressures from higher energy costs, global supply constraints and domestic inflation above the BoJ’s 2% target. Core consumer inflation remained close to that target in August, while companies continued passing higher costs on to food and other grocery products.
Rising wages are also becoming a more significant factor. Koji Nakamura, a BoJ executive director, said the country was experiencing a “slow-moving demographic shock”, with a shrinking labour pool pushing pay higher.
He said the structural pressure on wages “cannot be dismissed as temporary”, highlighting the challenge facing policymakers as they assess whether inflation is likely to endure.
The Bank of Japan’s decision also comes amid pressure linked to the interest-rate gap between Japan and the United States. The Federal Reserve raised rates on Wednesday and may increase them again later this year.
Analysts said a further widening of the gap could weaken the yen and add to inflation by increasing the cost of imports. Japan’s policy rate nevertheless remains below the European Central Bank’s, which lifted its key rate to 2.5% last week.
Markets will be watching Governor Kazuo Ueda’s briefing after the meeting for indications of how quickly the BoJ might raise rates again and how far its tightening cycle could go.
