The Bank of Japan (BOJ) on Tuesday raised its interest rates to a 31-year high, marking another significant stride in normalising its monetary policy. This move, the first since December, is primarily aimed at taming persistent price pressures stemming from the energy shock exacerbated by the Iran war. Japan’s central bank, responsible for maintaining financial stability and achieving price targets, is now aligning with other major central banks, such as the European Central Bank, in shifting towards tighter policy settings to combat inflation.
Deputy Governor Shinichi Uchida highlighted an improving economic outlook, noting that the risk of a sharp deterioration has diminished. However, he warned that price rises are broadening, presenting a risk that underlying inflation could deviate from the bank’s target. With underlying inflation now approaching 2%, Mr. Uchida underscored the importance of achieving the target stably. He also observed that wage growth is generally consistent with price targets, indicating that the mechanism by which wages and prices rise in tandem is becoming embedded.
Mr. Uchida acknowledged challenges in setting policy given wide estimates, stating the neutral interest rate level would be gauged by observing rate hike effects on Japan’s financial environment. While the BOJ does not directly target exchange rates, currency movements critically impact economic and price developments, with a weaker yen potentially having a larger pass-through effect on underlying inflation. He reiterated that the decision was driven by the need to address broadening price rises and underlying inflation risk, aligning with government efforts for sustainable growth.
