In a strategic move reflecting moderate economic growth coupled with an ongoing assessment of inflation trajectories, the Bank of Japan has announced the decision to maintain its key short-term policy interest rate at 0.25%. This announcement came on Friday as part of the central bank's continuing efforts to stabilize economic conditions.
On the topic of inflation, the Bank of Japan reaffirmed the outlook it presented last July, projecting that the country's consumer price index (CPI) core, which excludes fresh food items, is expected to rise by 2.5% on a year-over-year basis during fiscal 2024, concluding on April 1. Following this anticipated increase, the central bank expects the inflation rate to reduce to around 2% for fiscal 2025 and 2026.
The overarching objective remains the Bank of Japan's target of achieving a consistent 2% rate of inflation concerning the CPI core, an essential benchmark signaling economic stability. In terms of Japan's economic trajectory, the central bank made it clear that moderate growth is expected to persist.
"Japan's economy has recovered moderately, although certain sectors are displaying signs of weakness," stated the Bank of Japan in an official communication, emphasizing the balancing act the economy must maintain. While the nation's exports along with industrial production have exhibited stability, there has been an observable improvement in corporate profits.
Additionally, business fixed investment has been trending upwards at a moderate pace, hinting at renewed business confidence. An encouraging sign for the Japanese economy is the gradual improvement in the employment and income landscape. The central bank noted a moderate increase in private consumption; however, it also pointed out that housing investment has shown relative weakness, indicating a complex recovery journey ahead for the housing sector.
The Bank of Japan previously raised its key short-term interest rate to the current 0.25% level back in July. Prior to this, in March, the official rate was modified from 0% to 0.1%, moving away from the earlier negative range of -0.1%. This rate hike marked the first significant increase in interest rates in 17 years. Historically, Japan has faced nearly two decades characterized by sluggish economic growth and persistently low inflation, often hovering dangerously close to marginal deflation levels.
This was observed even as the Bank of Japan pledged to maintain its target inflation rate of 2%. In the wake of the COVID-19 pandemic, Japan experienced an inflation spike that peaked at an alarming 4.3% year-on-year in January 2023. However, this rate has since moderated down into the low 3% range throughout most of 2024.
In reaction to the Bank of Japan's latest announcement, the Nikkei 225 index saw a promising uptick, closing 1.5% higher amid expectations of a softer yen and enhanced prospects for exporting businesses. Furthermore, the official inflation rate for CPI-core registered at 2.8% year-on-year in August, according to the latest report from Statistics Japan..