What To Know About The Bank Of Japan’s Interest Rate Hike
The Bank of Japan raised its policy rate to a 30-year high on Friday to help control inflation as widely expected, and financial markets took the move in stride.
The 0.25 percentage point increase took the BOJ’s benchmark short-term interest rate to 0.75%, its highest level since September 1995. This will increase the costs of mortgages and other loans, but will also increase returns on savings deposits.
“It is highly likely that wages and prices will continue to rise moderately,” BOJ Governor Kazuo Ueda told reporters. “Risks to the economy have diminished, but we must remain vigilant.”
Inflation has been above the BOJ’s target of around 2% for a long time. Excluding variable fresh food costs, it was 3% in November.
The 0.75% rate is still low by most standards, but the BOJ has kept it near or below zero for years to save the economy from a deflationary scare. Since the pandemic, most other central banks, such as the US Federal Reserve, raised interest rates to offset rising inflation and then began lowering interest rates to help their slowing economies regain momentum.
Japan’s own economy contracted at an annual rate of 2.3% in the last quarter, but improving business sentiment and price pressures led the BOJ to relent and raise rates. Here are some things you need to know about his decision.
Japan’s interest rates rise while other countries’ interest rates fall Since Japan’s economic bubble burst in the early 1990s, the central bank has kept borrowing costs low to encourage businesses and consumers to spend more.
Low interest rates have also helped the central bank manage the country’s massive national debt, which is nearly three times the size of the economy.
As Japan’s population aged and began to decline, its economy slowed, leading to deflation, or falling prices due to weak demand. Even with cheap credit, investment is delayed and economic growth is hindered.
In early 2013, the central bank launched what has been dubbed the “big bazooka” initiative of quantitative easing, cutting interest rates and buying government bonds and other securities to help pump more money into the economy. When the Covid-19 pandemic hit, the benchmark interest rate was at minus 0.1%. The BOJ began raising interest rates in 2024, its first increase in 17 years, after inflation stabilized above its target of around 2 percent.
Weakening Japanese yen has boosted inflation The Japanese yen has weakened against the US dollar and most other major currencies. So Japanese consumers and companies are now paying more for imported food, fuel and other items needed to keep the world’s fourth-largest economy afloat.
A strong appetite for investing in dollar-denominated shares of companies linked to the AI boom also pulled money from the yen to the dollar.
Therefore, inflation rose faster than wages, household budgets were squeezed, and business costs increased.
Higher interest rates will increase the value of the yen against the dollar and will likely attract investments into Japan seeking higher yen-denominated returns. This may cause the yen to rise as the BOJ signals that it will continue to raise interest rates.
“The BOJ’s stance on interest rate hikes reflects the fact that inflation is consolidating,” Kei Fujimoto, senior economist at SuMi Trust, said in a comment. he said. “If factors such as further depreciation of the yen accelerate inflation going forward, it is possible that the pace of interest rate increases will increase accordingly.”
World markets are yawning. The advance notification of the planned interest rate increase by the Japanese media gave investors an advantage in adjusting their portfolios.
Initially, the yen weakened after Friday’s rate hike and the dollar rose to 157 yen, nearly double its level in 2012 and close to its highest level this year.
Yet even small changes in interest rates can have a big impact. Analysts predict that higher rates in Japan could undermine the investment strategy known as the “carry trade.” This involves investors borrowing money cheaply in yen and then using that money to invest in higher-yielding assets elsewhere.
Current trading is profitable when stocks and other investments are climbing, but losses can snowball if many traders face pressure to sell stocks or other assets at the same time.
Higher rates in Japan could also reduce demand for other assets, including cryptocurrencies. Last week, interest rate hike expectations caused the Bitcoin price to fall below $86,000. It reached record levels around $125,000 in early October. Bitcoin was trading at around $88,000 early Friday.
Risks for Japan Assessing the timing and scale of changes in interest rates and other monetary policies is the biggest challenge for central banks, given the time it takes for such moves to propagate through the real economy and financial markets.
Like the Federal Reserve, Japan’s central bank is trying to balance the need to boost business activity and create jobs with the need to keep inflation under control.
The BOJ previously postponed the interest rate hike due to uncertainties about how US President Donald Trump’s tariffs would affect automakers and other exporters. An agreement that reduced U.S. tariffs on imports from Japan to 15 percent instead of the previous 25 percent helped ease those concerns.
BOJ President Ueda noted that real interest rates remain in the negative zone as inflation is around 3%.
