Photo/Illutration Bank of Japan Governor Kazuo Ueda speaks at a news conference on Dec. 19 in Tokyo’s Chuo Ward. (Yasumasa Kikuchi)

The Bank of Japan raised its key policy rate to around 0.75 percent on Dec. 19, a 30-year high, arguing that the move was necessary to avoid being forced to make a more drastic hike later.

BOJ Governor Kazuo Ueda said that delaying a rate hike could create a "major negative for the economy and financial system," signaling a continued push to normalize monetary policy as wage growth appears set to continue.

GOVERNOR EXPLAINS THE HIKE

At a news conference following the BOJ's policy board decision, Ueda said the bank acted to prevent a more difficult scenario down the road.

"If we mistake the timing of a rate hike, or are too late, there is often the possibility of being forced into an extremely large rate hike later," Ueda said, calling such an outcome a "major negative."

The rate hike, the first in seven meetings since January, was approved unanimously by the nine-member policy board.

It raises the target for the uncollateralized overnight interbank call rate from around 0.5 percent to 0.75 percent, a level not seen since September 1995.

The move is expected to broadly push up variable interest rates on home loans, corporate borrowing costs and deposit rates.

Regarding the pace of future increases, Ueda remained noncommittal.

"It will depend on future economic, price and financial conditions," he said, adding that the board will make judgments at each meeting.

PATH TO NORMALIZATION

The decision marks the end of a period of careful observation for the central bank.

Since its last rate hike in January, the BOJ had paused its normalization push to assess the economic impact of U.S. tariff policy under President Donald Trump, who took office at the beginning of the year.

Having now judged those effects to be limited, the board moved forward, bolstered by signs of a sustainable wage growth.

A key factor was a Dec. 15 BOJ survey of its 33 head and branch offices, which showed that most expect high wage increases to continue into next year, fueled by strong corporate earnings and persistent labor shortages.

In a statement on Dec. 19, the BOJ said, "The possibility that solid wage increases will be implemented is high, and the risk that companies' proactive wage-setting behavior will be interrupted is considered low."

This comes as the consumer price inflation rate for November hit 3 percent year-on-year, remaining above the BOJ’s 2-percent target for three years and eight months.

GOVERNMENT ACCEPTS DECISION

The administration of Prime Minister Sanae Takaichi accepted the rate hike, despite some internal calls for caution.

While the administration favors an accommodative financial environment to boost investment, it also faced the risk that delaying a hike could accelerate the yen's depreciation and prolong inflation.

The BOJ has stated that financial conditions will remain accommodative even after the hike, a position that appears to have assuaged the government's concerns.

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