The Bank of Japan (BOJ) on Wednesday kept its key policy rate unchanged at 0.5% in a unanimous vote, in line with market expectations.
The decision comes as policymakers assess the potential impact of US President Donald Trump’s protectionist trade policies on Japan’s export-driven economy.
BOJ officials acknowledged that while Japan’s economy has been recovering moderately, there are signs of weakness in certain areas.
In a statement, the central bank cited “high uncertainties surrounding Japan’s economic activity and prices, including the evolving situation regarding trade … and domestic firms’ wage- and price-setting behaviour.”
The decision comes ahead of the US Fed’s policy meeting, where the central bank is expected to keep its benchmark interest rate steady.
Inflation pressures and wage growth
The BOJ noted that inflation expectations have risen moderately, pointing out that “rice prices are likely to be at high levels and the effects of the government’s measures pushing down inflation will dissipate” through fiscal 2025.
The decision to hold rates comes as the central bank monitors inflationary pressures stemming from wage gains and food price increases.
Japan’s largest labor union, the Japanese Trade Union Confederation (Rengo), announced last week that it secured an average wage increase of 5.46% from April, marking the highest gain in over three decades.
The first round of wage negotiations covered 760 unions and was 0.18 percentage points higher than last year’s 5.28% increase.
Small and medium-sized businesses saw an average wage increase of 5.09%, marking the first time since 1992 that wage hikes for such firms surpassed the 5% mark.
Meanwhile, UA Zensen, a labor federation representing retail and restaurant industry unions, reported an average wage increase of 5.37% for full-time workers, slightly below last year’s 5.91%.
Economic indicators and future rate hikes
Japan saw a two-year high inflation rate of 4% in January, with household spending beating expectations in December by rising 2.7% year-on-year—the fastest pace since August 2022.
However, household spending growth slowed in January to 0.8%.
The BOJ, which raised short-term rates to 0.5% from 0.25% in January after ending its long-standing stimulus program, has signaled that further rate hikes remain a possibility.
Some analysts expect a rate hike as early as May, particularly due to concerns over persistent inflationary pressures from rising wages and food prices.
However, the path forward for the BOJ has become more complicated following weaker-than-expected GDP figures released last week.
Revised fourth-quarter data showed that Japan’s economy grew at an annualized rate of 2.2%, a slower pace than initially reported and below economists’ median forecasts.
The BOJ has maintained that its goal is to establish a “virtuous cycle” of rising wages and prices.
However, with economic growth showing signs of slowing, policymakers may have to carefully balance their approach to tightening monetary policy in the months ahead.
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