Japan’s central bank has raised borrowing costs to their highest level in 17 years, following an acceleration in consumer price increases in December.
The Bank of Japan (BOJ) announced an adjustment to its short-term policy rate, raising it to “around 0.5%.” This decision came shortly after economic data revealed the fastest rise in prices in 16 months.
The BOJ’s previous rate hike in July, combined with a weak U.S. jobs report, surprised global investors and triggered a stock market selloff.
To prevent another market shock, Governor Kazuo Ueda signaled the latest rate hike in advance.
Official figures released on Friday showed that Japan’s core consumer prices rose by 3% in December compared to the previous year.
This marks the BOJ’s first rate increase since July and coincides with the return of Donald Trump to the White House.
During his campaign, Trump threatened tariffs on all U.S. imports, a move that could affect exporting nations like Japan.
By raising rates now, the BOJ aims to create room for potential rate cuts in the future to stimulate the economy if needed.
The decision underscores the central bank’s strategy to gradually increase rates to around 1%, a neutral level that neither accelerates nor slows economic activity.
The BOJ has also indicated that interest rates will continue to rise from their ultra-low levels.
Neil Newman, the head of strategy at Astris Advisory Japan said: “rates will continue to rise as wages increase, inflation remains above 2% and there is some growth in the economy.”
“We look for another 25-basis point hike in six months,” said Stefan Angrick, a Japan economist at Moody’s Analytics.
Last year, the BOJ raised the cost of borrowing for the first time since 2007 after rates had been kept down for years as the country struggled with stagnant price growth.
That hike meant that there were no longer any countries left with negative interest rates.
When negative rates are in force people have to pay to deposit money in a bank. They have been used by several countries as a way of encouraging people to spend their money rather than putting it in a bank.