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 , 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.”