Fitch Ratings recently released a report on the Bank of Japan’s (BoJ) policy outlook, predicting that the BoJ could hike rates to 0.5% by the end of 2024, 0.75% in 2025, and 1% by the end of 2026. This marks a departure from the global trend of policy easing, as the BoJ is taking a more aggressive stance to combat reflation.
The report highlighted that core inflation has been above the BoJ’s target for 23 consecutive months, indicating a growing conviction within the BoJ that reflation is becoming firmly established. Additionally, firms are reportedly ready to provide ongoing and substantial wage increases, signaling a significant shift from the stagnant wage growth experienced during the 1990s “lost decade” of persistent deflation.
The BoJ’s aim of creating a virtuous wage-price cycle is at the forefront of its policy decisions, with the central bank expressing confidence in its ability to continue raising rates towards neutral settings. This more hawkish approach by the BoJ could have global ramifications, as it diverges from the easing policies adopted by other central banks around the world.
Overall, the BoJ’s decision to hike rates more aggressively than previously anticipated reflects its belief that reflation is gaining traction, with core inflation consistently exceeding targets. The willingness of firms to provide substantial wage increases is a positive sign for the Japanese economy, indicating a departure from the low wage growth seen in previous decades.
As the BoJ continues on its path towards higher interest rates, it is expected to have significant implications not only for the Japanese economy but also for global markets. The central bank’s confidence in its ability to maintain a virtuous wage-price cycle suggests a positive outlook for Japan’s economic future, despite the challenges posed by past deflationary periods. Ultimately, the BoJ’s more hawkish stance could shape the trajectory of the global economy in the coming years.
