In a financial landscape where major economies are eyeing the rate-cut button, Japan is bucking the trend. The Land of the Rising Sun, famed for its ultra-loose monetary policy, is now emerging as the unlikely frontrunner in rate hikes for 2025.
With inflation proving stickier than the Bank of Japan (BOJ) had anticipated, policymakers lifted the short-term interest rate to 0.5% in January, a level unseen in 17 years. But this may only be the beginning. With core inflation hitting 4% in February, comfortably above the BOJ’s 2% target, markets are now pricing in at least one more hike this year, potentially pushing the rate to 0.75% by Q3.
In stark contrast, the U.S. Federal Reserve is taking a more measured approach, hinting at a possible slowdown in its balance sheet runoff rather than rushing into rate cuts. Across the Pacific, the Bank of Korea is expected to slash its benchmark rate by 25 basis points (bps) to 2.75% this month, as growth concerns weigh heavy.
And What of the Old Guard?
Europe’s financial titans the European Central Bank (ECB) and the Bank of England (BoE) find themselves at a crossroads. The ECB has kept markets guessing, but rate-setters in Frankfurt appear in no hurry to cut rates, wary of lingering inflation in services. Similarly, the BoE faces a precarious balancing act: while inflation is easing, wage growth and core inflation remain stubbornly high, forcing policymakers to keep their hands off the rate-cut lever for now.
The OECD has also stepped in with a word of caution, urging central banks not to rush into rate cuts given persistent inflationary pressures in the service sector. This leaves monetary authorities treading a fine line, tighten too much, and you strangle growth; loosen too soon, and inflation could come roaring back.
So, while the world watches for the first signs of rate relief, Japan stands apart as the only major economy in 2025 willing to take rates higher. Whether the BOJ is setting the stage for a new era of monetary policy or merely delaying the inevitable remains to be seen. But one thing is clear in a world of doves, Japan is the lone hawk.
By James Trescothick
Head of Market Research and Market Analysis
Risk Disclaimer: This information is for educational purposes only and does not constitute investment advice. Financial markets involve risks, and past performance is not indicative of future results. Always conduct your own research and seek professional advice before making investment decisions.
