Bank of Japan resumes pace of rate hikes, policy adjustments and economic outlook

Against the backdrop of complex and changing global economic environment, the Bank of Japan recently made a key monetary policy decision, which not only reflects its profound insight into the current economic situation in Japan and abroad, but also indicates the new trend of Japanese monetary policy for some time to come. Specifically, the Bank of Japan announced on the 24th that it would raise the policy rate by 25 basis points to 0.5%, which was widely expected by the market, marking the first time since July last year that Japan has resumed its interest rate hike cycle. It is worth noting that the increase was the largest since February 2007, pushing Japan's key interest rate to the highest level since the 2008 financial crisis, which undoubtedly attracted a lot of attention around the world.

In its announcement, the Bank of Japan made clear that the decision to raise interest rates was based on a prudent assessment of current economic and price trends. The Bank of Japan said that if the future economic and price trends are in line with expectations, it will continue to steadily raise the policy rate to deal with potential inflationary pressures and economic growth momentum. At the same time, the Bank of Japan also stressed that despite the adjustment of policy direction, real interest rates will remain in deep negative territory, which means that easy monetary conditions will still be maintained to a certain extent to support the continued recovery of the Japanese economy. The statement reflects the flexibility and strategy the BOJ has shown in balancing its twin goals of economic growth and price stability.

In terms of macroeconomic forecasts, the quarterly economic outlook released by the Bank of Japan provides a range of key data. The median forecast for Japan's core consumer price index (CPI) in the 2024-2026 fiscal year is expected to reach 2.2%, 2.51% and 2.1%, respectively, an upward revision from the October forecast, reflecting the gradual trend of higher underlying inflation and progress toward the central bank's inflation target. At the same time, the report also expects that the median growth rate of real gross domestic product (GDP) in the same period will be 0.5%, 1.1% and 1.0%, respectively, although it will fluctuate slightly, but the overall growth trend will remain stable. These forecasts provide an important reference for the Bank of Japan's monetary policy decisions.

It is worth noting that Japan's Ministry of Internal Affairs and Communications previously released data show that the national core CPI rose 3% in December last year, hitting a 16-month high, which is mainly due to the rise in energy prices. The data certainly provided the Bank of Japan with solid confidence that there was no need to delay the pace of interest rate hikes. Atsushi Takeda, chief economist at Itochu Research Institute, pointed out that the performance of the inflation data strengthened the central bank's determination to raise interest rates, indicating that the Japanese economy has some resilience.

However, the decision to raise rates also faces a number of challenges. The Japan Federation of Trade Unions (Rengo), the country's largest trade union, stressed that securing wage increases was crucial as falling real wages had become an important constraint on consumption growth. Capital Economics economist Toh Au Yu further noted that wage pressures in Japan will keep pressure on the central bank to raise interest rates this year. Recent surveys have shown that workers' wages are expected to rise sharply again in this year's "spring battle" (Japan's spring labor negotiations), which will help maintain the strong momentum of the wage-inflation spiral and keep it in line with the central bank's expectations.

In addition, changes in the international political and economic environment have also had an impact on the boj's decision-making. After U.S. President Donald Trump officially took office, his relatively calm stance on tariff policy helped ease market concerns and created favorable conditions for the Bank of Japan to raise interest rates. Nakayama, chief economist at Okayama Securities Research, believes that the Trump administration's policy changes have not caused market turmoil, which gives the Bank of Japan room to raise interest rates. At the same time, raising interest rates by only 25 basis points to 0.5% will not have a significant cooling effect on the economy, which helps to keep the economy growing steadily.

However, the impact of the decision to raise rates on the yen's exchange rate cannot be ignored. The yen fluctuated around the time of the announcement, reflecting the market's reaction to the decision. Jun Mitsumura, the finance ministry's top foreign exchange official, said Japan was closely monitoring changes in foreign exchange market positions to prevent currency fluctuations from adversely affecting the economy. At the same time, the BOJ also reiterated its concern about developments in the financial and foreign exchange markets, stressing the need to carefully examine the impact of corporate wage and pricing behavior on the economy and prices.

In financial markets, Japanese stocks continued their upward trend ahead of the rate decision, but lost some of their gains after the announcement. Futures on 10-year Japanese government bonds fell, reflecting expectations for future interest rates. Previously, the market had been worried that the BOJ rate hike could trigger market turmoil, but the Bank of America and other institutions believe that due to the current market environment and the change in the US employment data, the rate hike is unlikely to trigger a similar violent market reaction last August.

In terms of macroeconomic policies, the Japanese government has submitted a budget for fiscal year 2025 to the Diet, with a total of 115.54 trillion yen, more than 110 trillion yen for three consecutive years, the largest scale in history. The budget aims to address challenges to economic growth, including the impact of rising prices on consumers, by increasing public spending and providing fiscal support.

The Bank of Japan's decision to raise interest rates is an important choice made on the basis of deep insight into the economic situation at home and abroad. Despite a series of challenges and uncertainties, the Bank of Japan will continue to closely monitor economic developments and make timely adjustments to monetary policy to ensure steady and healthy economic development. In the future, with the changes in the economic environment at home and abroad and the continuous adjustment of policies, the Bank of Japan's monetary policy will continue to attract market attention.