The Bank of Japan (BOJ) yesterday hiked interest rates to a 31-year high as it battles inflation caused by the Middle East war — even after Washington and Tehran agreed a peace deal.
The central bank for the world’s fourth-largest economy raised its benchmark rate 25 basis points to 1.0 percent, the highest since 1995 and marking the first increase since December last year.
“While higher crude oil prices have been exerting downward pressure on economic activity, the economy has generally been supported by factors such as high levels of corporate profits, and an improvement in the employment and income situation,” the BOJ said.
Photo: AFP
The consumer price index (CPI) has been below 2 percent thanks in part to government energy subsidies.
“However, the price pass-through stemming from the rise in crude oil prices has been progressing at a relatively fast pace in business-to-business transactions, which could spread to an increase in consumer prices across a wide range of items,” the central bank added. “Against this backdrop, taking into account that medium to long-term inflation expectations have also continued to rise, there is a risk of underlying CPI inflation deviating upward to a level above the price stability target of two percent.”
The BOJ said that it would “continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
“In this regard, it will consider the timing and pace of adjustment, while closely monitoring the impact of the future course of the situation in the Middle East on Japan’s economic activity and prices,” it said.
BOJ Deputy Governor Shinichi Uchida later told reporters the central bank “will need to assess” how much inflation in the future “will be mitigated by the recent decline in crude oil prices.”
“There was no proposal of [hiking interest rate by] 50 basis points” during the two-day meeting that ended yesterday, said Uchida, who was filling in for Governor Kazuo Ueda, who is in hospital.
The BOJ also indicated that it would pause the tapering of its colossal program of government bond purchases after April next year, citing predictability of the bank’s bond purchases to improve bond market functioning and stability.
Japan relied on the Middle East for about 90 percent of its crude supplies before the war began on Feb. 28.
Its problems have been exacerbated by a falling yen, caused by the rise in oil prices and the gap between US and Japanese interest rates, which are among the lowest in the developed world.
The Japanese government spent about ￥11.7 trillion (US$72.97 billion) last month propping up the currency, which has been languishing at about ￥160 against the US dollar.
The yen briefly jumped against the greenback after the announcement yesterday, while the Nikkei 225 stock index rose above 70,000 points for the first time.
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