The Bank of Japan (BOJ) raised its key policy rate by 25 basis points to 0.5% on Friday, marking its first rate hike since 2008, as the central bank moves to normalize monetary policy amid improving domestic economic conditions.
Key Takeaways:
- Tightening decision passed with an 8-1 vote, with board member Toyoaki Nakamura dissenting
- Policy rate now stands at highest level since 2008
- BOJ signaled potential for gradual rate increases through 2025
- Wage negotiations remain a key focus for future policy decisions
The decision follows significant intervention in currency markets throughout the previous year, with Japanese authorities spending over 15.32 trillion yen to support the currency. Thanks to recent yen weakness, officials appeared less inclined to intervene directly in foreign exchange markets, focusing instead on monetary policy normalization to achieve currency stability.
Only one policymaker voted against hiking rates this time, as Toyoaki Nakamura cited that the central bank should decide on changing the guideline for money market operations only after confirming a rise in companies’ earnings power.
Link to official Bank of Japan Monetary Policy Decision (January 2025)
Along with their policy statement, the BOJ released their Monetary Policy Outlook, which had the details on updated growth and inflation forecasts:
- Median forecast for core CPI in fiscal 2025 is +2.4%, up from +1.9% in October
- Median forecast for core CPI next year is +2.0%, up from +1.9% in October
During the press conference, Governor Ueda reiterated that the next policy move will depend more on price pressures and less on economic growth. He added that they cannot guarantee that the risk of returning to deflation is zero but that they expect real wages to turn positive after the “shunto” wage negotiations.
Market Reaction
Japanese Yen vs. Major Currencies: 5-min
Overlay of JPY vs. Major Currencies Chart by TradingView
The Japanese yen, which had been cruising slightly lower after seeing the national core CPI figures, strengthened immediately following what was considered to be a “hawkish hike” announcement.
USD/JPY tumbled 0.3% to 155.61 while the yen rallied across the board, before paring some gains ahead of the press conference. Still, the yen was able to hold on to its lead against the franc (0.17%) and pound (0.12%), although it returned some of its post-BOJ winnings to the Aussie (-0.11%) and Kiwi (-0.21%) after the presser.
