The Bank of Japan (BoJ) raised its key short-term interest rate by 25 basis points to 0.75 percent on Friday, the highest level in 30 years. This marks a major shift from decades of ultra-low and negative rates, a policy aimed at stimulating growth and fighting deflation. The decision was unanimous and widely anticipated by markets.
Japan has been grappling with persistent inflation. Core consumer prices recently hovered around 3 percent, above the BoJ’s long-standing 2 percent target. The rate hike is part of an effort to normalize monetary policy while ensuring that inflation remains under control.
BoJ Governor Kazuo Ueda said the central bank will make future decisions based on economic data, including activity, prices, and financial stability. He added that even with the current increase, real interest rates are still negative, leaving room for further adjustments if needed.
Financial markets reacted quickly. The Japanese yen weakened against the US dollar, while Japan’s stock market, the Nikkei 225, maintained its gains. Government bond yields rose, reflecting expectations of continued tightening. Global bond markets, particularly in Europe, also saw modest increases in yields.
Investors worldwide are closely watching the BoJ’s move. Higher Japanese rates could make the “yen carry trade” less attractive. This trade, where investors borrow yen at low rates to invest in higher-yielding overseas assets, has been a key factor in global currency flows. A reduction in carry trades may create more volatility in foreign exchange and financial markets.
The BoJ’s decision highlights the challenges of balancing inflation control with economic growth in Japan, an economy facing structural pressures like a shrinking workforce. Analysts expect the central bank to monitor upcoming economic data carefully to determine the pace of future rate hikes.
This historic decision signals that Japan is moving toward a more conventional monetary stance, ending an era of ultra-cheap money that has defined the country’s economic policy for decades. Markets and policymakers globally will watch closely for any ripple effects in currencies, investment flows, and borrowing costs.
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