Bank of Japan raises short-term policy rate to 1% in a 7-1 vote

The Bank of Japan increased its short-term policy rate to 1% from 0.75% in a 7-1 vote. The hike reflects the bank's view of a moderate economic recovery despite risks from the Middle East, aiming to keep inflation at its 2% target.

The Bank of Japan raised its short-term policy rate on Tuesday to 1% from 0.75%, The Policy Board approved the move by a 7-1 majority vote. The new guideline for money market operations will take effect from Wednesday.

The interest rate applied to the complementary deposit facility, paid on current account balances held by financial institutions excluding required reserves, was raised to 1.0 per cent. The basic loan rate under the complementary lending facility was set at 1.25 per cent. The basic discount rate was also set at 1.25 per cent, though bill discounting remains suspended.

Dissenting Opinion

One board member, Asada Toichiro, dissented. He argued downside risks to production and employment from the Middle East situation outweighed upside price risks, and said the BOJ should maintain the prior guideline.

Economic Rationale for the Hike

The BOJ said the hike reflects its view that Japan's economy has recovered moderately despite some weakness tied to the Middle East situation. Higher crude oil prices are exerting downward pressure on activity. But the economy is supported by high corporate profits and improving employment and income conditions. The risk of a sharp slowdown has decreased, aided by government measures to cut household energy costs and progress securing alternative raw material supplies.

On prices, the year-on-year CPI increase excluding fresh food has recently run below 2 per cent due to those energy subsidies. However, the BOJ flagged faster pass-through of higher crude oil costs in business-to-business transactions. That could spread to consumer prices across a wider range of items. Medium- to long-term inflation expectations have also kept rising. With underlying CPI inflation approaching 2 per cent and financial conditions staying accommodative, the BOJ judged it appropriate to dial back accommodation to keep inflation anchored at its 2 per cent target on a sustainable basis.

Future Outlook

The central bank said accommodative conditions will persist even after the rate change, continuing to support activity. Going forward, it will keep raising the policy rate and adjusting accommodation based on economic, price and financial developments, while watching the Middle East impact and risks to its baseline outlook. (ANI)

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