| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Change | 25bp | 0bp to 25bp | 25bp | 0bp |
| Level | 0.5% | 0.25% to 0.5% | 0.5% | 0.25% |
Highlights
The Bank of Japan's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points to 0.5% in a third rate hike during the current normalization process begun in March 2024. Board member Toyoaki Nakamura, a former Hitachi executive, voted against the rate hike at this point, giving the same reason that he did in July: It would be better to wait until next meeting, in March, and confirm whether firms' ability to earn profits are rising.
Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity. Judging from views expressed by board members last year, the bank is staying the course of lifting the rate to at least 1%, which could still barely provide a minimum safety margin when a global crisis hits.
In its quarterly Outlook Report issued after the two-day meeting that ended Friday, the board repeated its recent view verbatim:"Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions."
Board members also maintained their risk assessment, saying,"There remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior."
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the bank said, repeating its view expressed last month and in October."In particular, with firms' behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices."
In the Outlook Report, BOJ policymakers basically maintained their medium-term moderate growth projections in the face of various headwinds while raising their inflation forecasts for the next 14 months as lingering domestic rice shortages continue pushing up processed food prices and import costs remain elevated amid the weak yen.
The board's median forecasts: GDP +0.5% (vs. +0.6% in October) in fiscal 2024 ending in March 2025, +1.1% (vs. +1.1%) in fiscal 2025 and +1.0% (vs. +1.0%) in fiscal 2026: core CPI (excluding fresh food) +2.7% (vs. +2.5%) in fiscal 2024, +2.4% (+1.9) in fiscal 2025 and +2.0% (+1.9%) in fiscal 2026. The bank noted that risks to growth are"generally balanced" while those to inflation are skewed to the upside for fiscal 2024 and 2025.
This means inflation is expected to be anchored around the bank's 2% target in about two years but it could still face a downside risk if firms fail to keep raising wages. CPI data for December released earlier Friday showed services costs rose 2.3% on year, far behind the 4.3% rise in goods prices. Real wages are falling from year-earlier levels, keeping many households wary of spending beyond necessities.
The BOJ is in the process of normalizing its policy by gradually lifting the rates from zero and slightly negative at every third or fourth meeting. The BOJ under Governor Ueda, who took office in April 2023, shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.
Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity. Judging from views expressed by board members last year, the bank is staying the course of lifting the rate to at least 1%, which could still barely provide a minimum safety margin when a global crisis hits.
In its quarterly Outlook Report issued after the two-day meeting that ended Friday, the board repeated its recent view verbatim:"Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions."
Board members also maintained their risk assessment, saying,"There remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior."
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the bank said, repeating its view expressed last month and in October."In particular, with firms' behavior shifting more toward raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices."
In the Outlook Report, BOJ policymakers basically maintained their medium-term moderate growth projections in the face of various headwinds while raising their inflation forecasts for the next 14 months as lingering domestic rice shortages continue pushing up processed food prices and import costs remain elevated amid the weak yen.
The board's median forecasts: GDP +0.5% (vs. +0.6% in October) in fiscal 2024 ending in March 2025, +1.1% (vs. +1.1%) in fiscal 2025 and +1.0% (vs. +1.0%) in fiscal 2026: core CPI (excluding fresh food) +2.7% (vs. +2.5%) in fiscal 2024, +2.4% (+1.9) in fiscal 2025 and +2.0% (+1.9%) in fiscal 2026. The bank noted that risks to growth are"generally balanced" while those to inflation are skewed to the upside for fiscal 2024 and 2025.
This means inflation is expected to be anchored around the bank's 2% target in about two years but it could still face a downside risk if firms fail to keep raising wages. CPI data for December released earlier Friday showed services costs rose 2.3% on year, far behind the 4.3% rise in goods prices. Real wages are falling from year-earlier levels, keeping many households wary of spending beyond necessities.
The BOJ is in the process of normalizing its policy by gradually lifting the rates from zero and slightly negative at every third or fourth meeting. The BOJ under Governor Ueda, who took office in April 2023, shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.
Market Consensus Before Announcement
The Bank of Japan's nine-member board is widely expected to decide in a majority vote to raise the policy interest rate by another 25 basis points to 0.5% at its meeting on Jan. 23-24 after leaving it steady at 0.25% in the last three meetings. The bank raised the key rate to the current level from a range of 0% to 0.1% in July and conducted its first rate hike in 17 years in March 2024, when it also ended its controversial seven-year-old yield curve control framework.
This is part of the bank's policy normalization process following a decade of large-scale monetary easing aimed at reflating the economy. It is expected to lift the overnight rate to around 1% by the end of 2025 or early 2026.
This is part of the bank's policy normalization process following a decade of large-scale monetary easing aimed at reflating the economy. It is expected to lift the overnight rate to around 1% by the end of 2025 or early 2026.
Definition
The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.
Description
The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
