After the Bank of Japan increased short-term interest rates on Friday, while other central banks are (mostly) cutting them, wealth managers discuss the impact and the possibility of further rate rises in 2025.

On Friday, in a bid to curb inflation, the Bank of Japan (BoJ) increased short-term interest rates to 0.5 per cent, elevating its policy rate to the highest level since 2008. The central bank’s decision was carried by a vote of eight to one by the bank’s policy board.

The Japanese yen strengthened against the dollar as a result of the widely-anticipated 25-basis-point rate hike. The market expects additional rate rises while the BoJ cited expectations of wage growth in spring 2025 and inflation increases.

Recent price data show inflation at around the central bank’s 2 per cent target. Consumer prices, excluding volatile food prices, rose last year at an average of 2.5 per cent, marking the third year of increase.

Mark Dowding, CIO at RBC BlueBay Asset Management, sees the BoJ hiking rates again in July to 0.75 per cent with cash rates hitting 1 per cent next January. “This should see 10-year JGB yields rise towards 1.75 per cent, though we feel that longer dated bonds may hold in better with the 10/30 yield curve continuing to flatten, in line with the recent trend,” Dowding said in a note.

“Japan's macroeconomic and inflation cycles are currently out of sync with those of other developed economies,” Claire Huang, senior emerging market macro strategist at Amundi Investment Institute, added.

“Since last summer, Japan started to register positive real wage growth alongside inflation driven by domestic demand. This favourable wage-inflation dynamic supports the BoJ potential for further rate hikes this year,” Huang continued. She also anticipates one additional hike of 25 basis points in July, which would raise Japan's policy rate to 0.75 per cent. The tightening effects of these hikes are expected to be mitigated by increased returns on savings and ongoing wage growth.

Japan's hike in rates marks a contrast with cuts by central banks in recent months such as the US Federal Reserve, Bank of England and European Central Bank. That said, the threat of tariffs coming in under the new Trump administration has been cited as an inflationary factor, potentially curbing the Fed's ability to ease policy. Even so, the path of rates is, on balance, positive for the Japanese yen against the dollar, the euro and other major currencies.

Confidence
Although inflation is generally regarded as a problem by economists, Japan has sought to create some inflation to counter more than two decades of deflation, a process that made debt repayment harder and which has weighed on public finances. 

“The move by the Bank of Japan shows that it has increased confidence in the durability of inflation and growth rates in Japan,” David Mitchinson, partner and senior portfolio manager at specialist Japan investment boutique Zennor Asset Management, said. “It has been trying for at least 20 years to generate a sustainable, moderate level of inflation. Today's interest hike shows that it thinks that it has just about got there. It will be willing to be behind the curve, but it doesn’t want to be too far behind the curve.” 

“It has to grapple with both US President Donald Trump and the Japanese political cycle, but I don't see in any sense that it is moving too fast – rates are only 50 basis points. It's not exactly a tight monetary policy. Most people believe that at a minimum, rates should be around about 1 per cent, probably higher,” Mitchinson continued.

“The Japanese economy is very much a two-track economy. Some areas are booming. If you're in central Tokyo, there is a sense that the economy is booming. If you go to Kyoto, you can hardly move,” Mitchinson said. “People have been making some serious money in Japan. You have groups of people in finance or entrepreneurs, who are doing very well, but there's also a big swathe of the broader population who are not. And the BoJ is trying to grapple with this.” 

“The Bank of Japan and the government want growth in real wages. Last year, for the first time since the bubble economy of the late 80s, we saw that happening. This year the consensus is that we'll probably see another year of real wage growth. That's the government's core focus,” Mitchinson continued. “And if they can achieve that, then they'll feel they’d have more scope to raise interest rates. The current government doesn't have a controlling majority. It is going to have to hold elections later this year and it would like to go into those with a much stronger economy. At the moment it doesn’t have that, so it is looking for real wages to continue to grow for a better outcome.”