Bank of Japan raises interest rate to about 0.5%, citing higher wages and inflation

TOKYO (AP) — The Bank of Japan raised its key interest rate to about 0.5% from 0.25% Friday, noting that inflation is holding at a desirable target level.

The decision by the central bank came at the end of a two-day policy board meeting in Tokyo.

BOJ Gov. Kazuo Ueda, set to speak to reporters later in the day, repeatedly indicated the move was coming. Recent price data show inflation hovering at about the central bank’s 2% target.

Government data released hours before the decision showed consumer prices, excluding volatile food prices, rose last year at an average rate of 2.5%, marking the third straight year of increase. The consumer price index, excluding food, for the month of December alone showed a 3% rise.

Another long-term concern was wage growth. Recent data show Japanese workers are gaining better wages and are generally set to receive solid pay raises in their upcoming annual union negotiations.

The labor ministry adjusted its wage data for November to a rise of 0.5%, instead of a decline, helping to support the Bank of Japan's decision.

The central bank has signaled that more interest rate raises may be coming, while stressing it plans to be extremely cautious to ensure the economy holds steady.

Share prices fell after the announcement, as the value of the Japanese yen gained against the U.S. dollar. A rate rise in July last year sent stock prices tumbling. The bank is also watching for market reactions to the policies of U.S. President Donald Trump.

The Bank of Japan increased the rate for the first time in 17 years in March last year, ending its negative interest rate policy, which amounts to negative borrowing rates.

Japan’s longtime ultra-lax monetary policy was meant to wrest the economy out of deflationary tendencies and boost growth. Deflation stagnates growth, as companies invest less, cut back on wages and people hold back on spending.

Japan’s stance is at odds with the loosening trends adopted by the U.S. Federal Reserve and the European Central Bank, which have been cutting rates after raising them to clamp down on inflation. The Fed indicated recently it will slow the pace of rate cuts.

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