The Bank of Japan (BOJ) has raised borrowing costs to their highest level in 17 years. This decision follows a surge in consumer prices, which rose sharply in December.

The BOJ increased its short-term policy rate to approximately 0.5%, just after economic data revealed the fastest price growth in 16 months.

Context of the Rate Hike

This marks the BOJ’s first interest rate hike since July, a move previously unforeseen by global investors. Back in July, the rate hike, combined with weak U.S. job data, caused a global stock market selloff. To avoid similar market shocks, BOJ Governor Kazuo Ueda preemptively signaled this latest increase.

Japan’s core consumer prices rose by 3% in December compared to the same period a year earlier. This highlights ongoing inflation, which remains above the BOJ’s 2% target.

The rate increase also coincides with renewed concerns about global trade. For instance, Donald Trump’s return to the White House has revived fears of U.S. tariffs on imports, potentially impacting exporting nations like Japan.

Future Rate Plans and Market Outlook

The BOJ’s decision aligns with its goal to gradually raise rates to around 1%, a level intended to maintain economic balance. By acting now, the central bank gains flexibility to cut rates in the future if economic stimulus is needed.

Experts predict further rate increases. Neil Newman of Astris Advisory Japan commented, “Rates will rise as wages increase, inflation stays above 2%, and the economy grows.” Stefan Angrick, a Moody’s Analytics economist, expects another 25-basis-point hike within six months.

Last year, the BOJ ended a prolonged period of ultra-low rates, raising borrowing costs for the first time since 2007. This move eliminated negative interest rates in all major economies.

Negative rates, where depositors pay to keep money in banks, were introduced in some countries to encourage spending. However, Japan’s return to higher rates signals a shift toward addressing inflation and fostering stable growth.