Bank of Japan raises rates to 30-year high, signals more hikes

By Leika Kihara and Makiko Yamazaki

TOKYO, Dec 19 (Reuters) – The Bank of Japan raised interest rates on Friday to levels unseen in 30 years, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.

The central bank also signalled its readiness to continue raising rates by offering a slightly more upbeat view on the growth and inflation outlook, underscoring its conviction Japan was on course to stably hit its 2% inflation target backed by wage gains.

But the yen fell after Governor Kazuo Ueda offered few hints on how far the BOJ could eventually raise rates, saying only the pace and timing of further hikes will depend on how the economy reacts to each policy shift.

“He didn’t offer new hints and didn’t appear to be keen to hike in a rush. That may have fuelled perceptions the BOJ will take time raising rates, thereby weakening the yen,” said Masato Koike, senior economist at Sompo Institute Plus in Tokyo.

In a widely expected move, the BOJ raised short-term interest rates to 0.75% from 0.5% in the first increase since January. The decision was made by a unanimous vote.

The move takes interest rates to levels unseen since 1995, when Japan was reeling from the burst of an asset-inflated bubble that drew the BOJ into a prolonged battle with deflation.

“Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained,” the BOJ said in a statement explaining the policy decision.

“Given that real interest rates are at significantly low levels, the BOJ will continue to raise interest rates” if its economic and price forecasts materialise, it said.

While Ueda said the BOJ could see scope to raise rates further if wage hikes continued to broaden, he remained vague on the exact timing and pace of further hikes.

“We will update at each meeting our views on the economic, price outlook as well as risks and the likelihood of achieving our forecasts, and make an appropriate decision,” he told a press briefing after the meeting.

Japan’s 10-year government bond yield jumped to a 26-year peak on the BOJ’s rate decision. But a lack of hawkish signals from Ueda triggered a broad-based decline in the yen. The dollar rose to a one-month high above 157 yen.

VAGUE ON NEUTRAL RATE

In the statement, the BOJ maintained its view that underlying inflation will converge around its 2% target in the latter half of its three-year projection period through fiscal 2027.

But hawkish board members Hajime Takata and Naoki Tamura dissented from this view, highlighting simmering concern within the board over broadening inflationary pressure.

The hike to 0.75% pushes the BOJ’s policy rate closer to the bottom of its estimated 1.0%-2.5% range of Japan’s neutral rate, or the rate that neither cools nor stimulates the economy.

As a result, markets had focused on Ueda’s comments about the neutral rate to gauge the peak of this hiking cycle.

“Even after raising rates to 0.75%, there’s some distance to the bottom of our estimated range of neutral,” Ueda said, suggesting the BOJ was not done raising rates. But he offered no clarity on how many hikes would take rates to neutral.

“In judging the degree of monetary support, we need to look not just at the distance from the neutral rate but real interest rates, lending and developments in the economy,” Ueda said.

The BOJ ended a decade-long, massive stimulus last year and raised rates twice including to 0.5% from 0.25% in January on the view that Japan was on the cusp of durably hitting its 2% inflation target.

Its past decisions to stand pat since then had drawn two dissenters in September and October, as stubbornly high food prices kept inflation above 2% for nearly four years.

Critics have blamed the slow pace of the BOJ’s rate hikes for the weak yen, which has become a headache for policymakers by pushing up import costs and broader inflation.

The yen’s recent declines and subsequent inflationary pressures helped the BOJ convince dovish Premier Sanae Takaichi’s administration of the need for another rate increase.

But not all appeared pleased with Friday’s rate hike.

Economy Minister Minoru Kiuchi told reporters that while he respected the BOJ’s decision, a rate hike would increase debt payment costs and require policymakers to be vigilant to the impact on the economy.

(Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Satoshi Sugiyama, Kantaro Komiya and Chang-Ran Kim; Editing by Sam Holmes and Jacqueline Wong)