The Bank of Japan (BoJ) has increased its short-term policy rate by a quarter of a percentage point, bringing it to 1% from 0.75%. This marks the highest level in 31 years, as the central bank seeks to mitigate inflationary pressures stemming from the ongoing Iran war.
Rate Hike Amid Falling Oil Prices
Policymakers in Tokyo decided to tighten monetary policy despite a recent decline in oil prices, following a preliminary peace agreement between Washington and Tehran. The BoJ also noted that Japan's annual core inflation had dropped to a four-year low of 1.4% in April. Nonetheless, the central bank warned that companies were passing on rising oil costs at a relatively fast pace.
Central Bank Governor's Remarks
BoJ Governor Shinichi Uchida described the US-Iran memorandum to end the Middle East conflict as a welcome move but expressed uncertainty about the speed of oil supply recovery. He stated, "Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a risk that underlying inflation may deviate from our target." Uchida emphasized the importance of achieving the 2% inflation target stably.
Economic Outlook and Government Support
The BoJ noted that the risk of a severe economic downturn from the Middle East conflict has lessened, partly due to the government's relief package aimed at helping households cope with high fuel costs. Tuesday's rate hike pushes Japan's borrowing costs to their highest since 1995, when the BoJ was in the process of lowering rates after the asset bubble burst.
Market Reaction and Expert Analysis
Susannah Streeter, chief investment strategist at Wealth Club, commented, "The move was widely expected, but it's a step-change in monetary policy for Japan, given it pushes borrowing costs to levels not seen since 1995. There was some relief that the move wasn't more hawkish, with even a 50-basis-point hike having been mooted." Tokyo's stock market closed at a new record high, with the Nikkei index reaching 70,000 points during Tuesday's trading session, surging by a third this year.
Historical Context
In 1973, the BoJ raised rates to 9% to combat inflation from the Opec oil embargo. However, by 2016, it had implemented a negative interest rate policy to escape a prolonged deflationary slump following the asset boom's end in the late 1980s. The BoJ is the second G7 central bank to raise rates since the Iran war began, following the European Central Bank's increase last week. The US Federal Reserve and the Bank of England are expected to maintain their current rates this week.
