Japan’s Central Bank Raises Borrowing Costs to Highest Level in 17 Years
In a bold move, Japan’s central bank has increased the cost of borrowing to its highest level in 17 years as consumer price rises accelerated in December.
The Bank of Japan (BOJ) raised its short-term policy rate to “around 0.5 percent” shortly after the latest economic data revealed prices surged last month at the quickest pace in 16 months.
This rate hike, coming after the BOJ’s last increase in July, coupled with a weak jobs report from the US, caught investors off guard and triggered a global stock market selloff.
BOJ Governor Kazuo Ueda had hinted at this move in advance to prevent another market shock.
Official figures released on Friday showed core consumer prices in Japan rose by 3% in December compared to a year earlier.
Marking the BOJ’s first rate hike since July, this decision was made just days after Donald Trump’s return to the White House.
During his election campaign, Trump had threatened to impose tariffs on all imports into the US, potentially impacting exporting countries like Japan.
By raising rates now, the BOJ aims to have more flexibility to cut rates in the future if necessary to stimulate the economy.
This move underscores the central bank’s intention to gradually increase rates to around 1%, a level that is viewed as neither stimulating nor slowing down the economy.
The BOJ has signaled that interest rates will continue to rise from their ultra-low levels.
Neil Newman, head of strategy at Astris Advisory Japan, stated, “Rates will continue to rise as wages increase, inflation remains above 2%, and there is some economic growth.”
“We anticipate another 25-basis point hike in six months,” said Stefan Angrick, a Japan economist at Moody’s Analytics.
Last year, the BOJ raised borrowing costs for the first time since 2007, ending the era of negative interest rates in all countries.
Negative rates force individuals to pay to deposit money in a bank, serving as an incentive to spend rather than save. Several countries have adopted this strategy to encourage economic activity. — BBC
