The Bank of Japan raised interest rates to a 31-year high on Friday, with its governor signalling the central bank has entered a new phase focused on preventing inflation from overshooting its target, opening the door to further rate hikes.
BOJ raised its policy rate by +25bps to 1.25% at its Sep-26 meeting, reaching its highest level since 1995. The decision was approved by a 7-2 vote, with policymakers citing persistent inflationary pressures driven by elevated energy prices, rising wages and elevated import costs pushed up by yen weakness.
The rate hike reflects the BOJ’s continued efforts to normalise monetary policy after decades of ultra-low interest rates. Policymakers remain concerned that a depreciating yen will further drive-up import prices and fuel inflation, particularly as Japan remains heavily dependent on imported energy and raw materials.
MBSB in its research note expects the BOJ to keep rates unchanged in the near term while assessing the impact of recent policy tightening on inflation, wage growth and economic activity that remain around or above the central bank’s 2% target. While the BOJ is likely to remain data-dependent, the possibility of another rate increase cannot be ruled out should inflationary pressures persist and the yen remain weak.
