Inflation Keeps Biting In Japan. The Central Bank Just Hiked Rates To The Highest Level In More Than 30 Years.

The Bank of Japan raised interest rates by 25 basis points to 1.25% on Friday, the highest in more than 30 years, as inflation keeps biting in the country.

The decision was not unanimous, with two board members dissenting. The hike was widely expected: almost 90% of economists surveyed by CNBC believed the move would take place. They also expected for Toichiro Asada and Ayano Sato, both of whom have been appointed by Prime Minister Sanae Takaichi, to dissent. The prime minister has generally favored accommodative monetary policy alongside fiscal support.

The central bank said in a statement that the move was a result of a risk that inflation will stray from the 2% goal. The latest headline rate stood at 1.9% in August, leading Tokyo and Washington to coordinate an intervention to support the yen.

The move marks another step in the BOJ's exit from years of ultra-low and negative interest rates. It also comes only three months after the central bank's last increase, shortening the roughly six-month intervals between previous rate hikes since Japan began normalizing monetary policy in March 2024.

The BOJ raised its short-term policy rate to about 1% in June, continuing a tightening cycle that began when the central bank ended its negative interest-rate policy in March 2024.

Wage growth has also strengthened, with Japan's Ministry of Health, Labour and Welfare reporting that inflation-adjusted real wages increased 2.4% in July from a year earlier, extending a run of gains in workers' purchasing power.

The combination of wages and prices is particularly important for the BOJ, which has spent years looking for evidence that higher pay can support consumption and generate more durable inflation rather than price increases driven primarily by imported costs.

The central bank has repeatedly said it will continue raising its policy rate if economic activity and prices develop broadly in line with its outlook.

The policy debate has also taken place against heightened attention from Washington to Japan's monetary and foreign-exchange policies.

U.S. Treasury Secretary Scott Bessent met BOJ Governor Kazuo Ueda during the G20 finance ministers and central bank governors gathering in North Carolina earlier this month. Bessent called for "sound formulation and communication of monetary policy" and discussed steps aimed at limiting excessive currency volatility, the Treasury said following the meeting.