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Japan’s central bank raised borrowing costs to their highest level in 17 years as inflation surged in December. This decision reflects a shift in monetary policy as the country grapples with rising consumer prices.

December Data and Policy Shift

The Bank of Japan (BOJ) raised its short-term policy rate to approximately 0.5%. This announcement came shortly after economic data revealed that consumer prices rose at their fastest pace in 16 months. Official figures showed core consumer prices increased by 3% in December compared to the same month last year.

This marks the BOJ’s first rate hike since July, aiming to manage inflation and stabilize the economy. The central bank’s governor, Kazuo Ueda, had previously signaled this move to avoid market surprises. In July, the BOJ’s unexpected rate hike and a weak U.S. jobs report caused global market turmoil, including a significant stock selloff.

Global and Domestic Impacts

The timing of this decision coincides with geopolitical shifts, including Donald Trump’s return to the White House. Trump’s campaign promises, like imposing tariffs on all U.S. imports, could influence exporting economies such as Japan.

By raising rates now, the BOJ creates room for potential future rate cuts if economic stimulation becomes necessary. The central bank plans to gradually increase rates to around 1%, a level considered neutral for economic growth. This approach reflects its strategy to balance inflation and economic stability.

The BOJ signaled that ultra-low interest rates will continue to rise. Experts predict a steady increase in borrowing costs. Neil Newman, head of strategy at Astris Advisory Japan, remarked, “Rates will rise as wages grow, inflation remains above 2%, and the economy expands.” Similarly, Stefan Angrick, a Japan economist at Moody’s Analytics, anticipates another 25-basis-point hike within six months.

End of Negative Interest Rates

Last year, the BOJ ended its long-standing policy of negative interest rates, which had been in place since 2007. Negative rates required depositors to pay for keeping money in banks, encouraging spending instead of saving. This policy shift marked the end of a period where no countries maintained negative interest rates.

The recent rate hikes highlight Japan’s changing monetary landscape and its efforts to address inflation while fostering sustainable economic growth.