Japan's central bank raised interest rates to their highest level in three decades on Tuesday, as policymakers grew more concerned about inflation risks stemming from higher energy costs.
The Bank of Japan increased its short-term policy rate by 25 basis points to 1.0% from 0.75% at the conclusion of its two-day policy meeting.
The move lifts Japan's benchmark interest rate to its highest level since 1995 and marks the latest step in the central bank's effort to normalize monetary policy after years of ultra-loose settings.
The central bank said Japan's economy has recovered moderately, although some weakness has been observed, partly due to the impact of the situation in the Middle East.
While higher crude oil prices have weighed on economic activity, the central bank said the economy has generally been supported by factors such as strong corporate profits, improving employment and income conditions, and government measures to reduce the burden of higher energy costs.
"Japan's economy has been developing generally in line with the baseline scenario, which expects that the economy will continue growing moderately, albeit at a decelerated rate," the BOJ said.
On prices, the central bank said consumer inflation excluding fresh food has recently remained below 2%, partly due to government measures to ease household energy costs.
However, it warned that the pass-through of higher crude oil prices has been progressing relatively quickly in business-to-business transactions and could spread to consumer prices across a wide range of goods.
"There is a risk of underlying CPI inflation deviating upward to a level above the price stability target of 2 percent," the BOJ said.
The central bank said medium- to long-term inflation expectations have continued to rise, while financial conditions remain accommodative and real interest rates remain negative.
"In view of these developments in economic activity and prices as well as financial conditions, the Bank judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent," it said.
Looking ahead, the BOJ said it will continue to raise the policy interest rate and adjust the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions.
The central bank said it would consider the timing and pace of future adjustments while closely monitoring the impact of developments in the Middle East on Japan's economy and inflation outlook.
The decision was made by a 7-1 vote. Governor Kazuo Ueda missed the meeting and did not vote due to a two-week hospital stay for an infected liver cyst, according to a Reuters report.
Board member Toichiro Asada dissented, arguing that downside risks to production and employment from the situation in the Middle East outweighed upside risks to prices and that the current policy setting should be maintained.
Attention will now turn to remarks from Deputy Governor Shinichi Uchida, who is scheduled to brief reporters in place of Ueda and could offer further clues on the timing and pace of future rate increases.
"I expect a hawkish message today. But the BOJ seems intent on avoiding saying anything that could be taken as a firm commitment, so I do not think it will provide many concrete hints," Masato Koike, senior economist at Sompo Institute Plus, was quoted as saying by Reuters.
