Japan hikes interest rate to highest level since 1995 as inflation bites
Japan’s central bank raised its key interest rate to a 30-year high as the country faces a cost of living crunch.
In a widely anticipated decision, the Bank of Japan’s policy board, led by Governor Kazuo Ueda, raised its benchmark interest rate by a quarter point to “around 0.75%” on Friday.
The move comes as new Prime Minister Sanae Takaichi is keen for inflation to fall but also needs the cost of government borrowing to be cheap.
This marks both the BOJ’s first rate hike since January and the first since Takaichi and Ueda took on their current roles.
When a central bank increases interest rates, it tends to have the effect of increasing the value of the country’s currency.
In the case of Japan, the yen has the potential to reduce inflation as the low value of the yen against other major currencies such as the US dollar and euro raises import costs, which in turn has helped increase inflation.
At the same time, higher interest rates also increase government borrowing costs because when rates rise, governments, like everyone else, have to pay more to borrow.
Last year, Takaichi described the idea of raising interest rates as “stupid”, although he had not publicly criticized Ueda’s policies since he took office in October.
Still, Takaichi has made fighting inflation a priority as rising costs erode support for his party, the LDP.
Official figures on Friday showed that inflation in Japan, excluding food and fuel, rose 3% in November. This rate remains above the bank’s target rate of 2%.
But Shoki Omori, chief strategist at Mizuho in Tokyo, told the BBC that an interest rate hike would do little to ease inflation as inflation was already priced in by foreign exchange markets and the yen remained relatively weak.
Most economists expect the BOJ to raise its benchmark interest rate once again next year, to 1%.
This marks a major change in Japanese policymakers’ approach to interest rates.
“After nearly three decades of low interest rates in Japan, we are seeing a historic shift,” said Julia Lee of Pacific FTSE Russell, part of the London Stock Exchange Group.
But Shigeto Nagai, head of Japan economics at Oxford Economics, said Takaichi’s stance on monetary policy could make it difficult for the bank to raise interest rates again.
“The BOJ will probably need around six months to monitor the impact of the interest rate hike on the real economy before making its final move,” he said.
The BOJ’s latest interest rate hike came as other major central banks around the world moved in the opposite direction, reducing borrowing costs.
The Bank of England on Thursday cut its key interest rate to 3.75%, the lowest level since February 2023.
Last week, the Federal Reserve cut interest rates for the third time this year, even as internal divisions created uncertainty about additional cuts in coming months.
The central bank said it had cut its key lending interest rate target by 0.25 percentage points, putting it in a range of 3.50% to 3.75%, the lowest in three years.
