Japan’s central bank has raised borrowing costs to their highest point in 17 years. This decision comes after consumer prices saw an accelerated rise in December.
The Bank of Japan (BOJ) increased its short-term policy rate to “around 0.5 percent.” This move follows recent data showing that prices in December increased at the fastest pace in 16 months.
Surprise Move and Market Reaction
In fact, the BOJ’s previous rate hike in July, coupled with weak US jobs data, led to a global stock market selloff. However, Governor Kazuo Ueda had signalled this latest rate hike in advance to prevent another market shock.
Rising Consumer Prices
According to official figures, core consumer prices in Japan rose by 3% in December compared to a year earlier. This hike marks the BOJ’s first rate increase since July, which occurred just days after Donald Trump returned to the White House.
Impact of Trump’s Tariff Threat
Moreover, during his election campaign, Trump threatened to impose tariffs on all US imports. This could have a significant impact on exporting countries like Japan, which rely heavily on US markets.
Room for Future Cuts
By raising rates now, the BOJ gains the flexibility to lower rates in the future if the economy requires support. In fact, the central bank plans to gradually increase rates to around 1%, a level that is seen as neither stimulating nor hindering economic growth.
End of Negative Interest Rates
Additionally, last year, the BOJ raised borrowing costs for the first time since 2007. This decision ended the era of negative interest rates, which had been implemented to encourage spending over saving in banks.
