BOJ to Keep Raising Benchmark Rate If Outlook Is Met, Ueda Says

The Bank of Japan (BOJ) is poised to continue raising its benchmark interest rate if the economic outlook remains favorable, according to Governor Kazuo Ueda. This stance comes as the central bank navigates a delicate balance between controlling inflation and supporting economic growth in the face of global uncertainties.



The BOJ's decision to raise interest rates in January, from 0.25% to 0.5%, was a significant move aimed at curbing inflation, which has been running significantly above the bank's 2% target. The latest data shows that the headline inflation rate hit a two-year high of 4% in January, while the "core-core" inflation rate, which excludes fresh food and energy, climbed to 2.5%. These figures have raised concerns among policymakers about the potential for inflation expectations to exceed the target, leading to a stronger perception of price increases among economic entities.

One of the key factors driving the BOJ's decision to raise rates is the sustained wage gains in Japan. Big Japanese firms have offered bumper pay hikes in wage talks with unions for a third straight year, backing the BOJ's view that sustained wage gains will keep inflation durably around its 2% target. Governor Ueda has mentioned that wage trends are "on track" or slightly stronger, which could influence future interest rate decisions.

However, the BOJ's cautious approach to raising interest rates is also influenced by global trade policies, particularly those of the United States. President Trump's economic policies, including the imposition of tariffs, have created uncertainty and could affect Japan's export-reliant economy. The BOJ is scrutinizing the impact of these policies on the global and Japanese economies. For instance, the United States raised tariffs on imports of steel and aluminum to 25%, and Washington is expected to announce auto tariffs on April 2, 2025. These developments could lead to stagflation, where inflation is high, and economic growth is slow, complicating the BOJ's monetary policy decisions.

The BOJ's cautious approach to raising interest rates contrasts with the strategies of other major central banks, such as the Federal Reserve. The Federal Reserve has been more aggressive in raising rates to combat inflation, while the BOJ is taking a more gradual approach. This cautious approach has implications for global financial markets, including currency markets, global inflation, investment flows, and global trade.

In summary, the BOJ's decision to keep raising its benchmark interest rate if the economic outlook remains favorable is a reflection of the central bank's cautious approach to monetary policy. The BOJ is closely monitoring key economic indicators, including inflation rates, wage trends, and global trade policies, to determine whether the outlook for the Japanese economy is being met. These indicators will influence future interest rate decisions, with higher inflation and wage gains potentially leading to further rate hikes, while economic slowdowns and global trade uncertainties could lead to a more cautious approach.