The Bank of Japan raised its key policy rate to a 30-year high on Friday to help curb inflation, as widely expected, and financial markets took the move in stride. <\/p>\n
The 0.25 percentage point hike took the BOJ\u2019s benchmark short-term rate to 0.75%, its highest level since September 1995. It will raise costs for mortgages and other loans, but also boost yields on savings deposits. <\/p>\n
\u201cIt is highly likely that wages and prices will continue to rise moderately,\u201d BOJ Gov. Kazuo Ueda told reporters. \u201cRisks to the economy have diminished, but we must remain vigilant.\u201d<\/p>\n
Inflation has long remained above the BOJ\u2019s target of about 2%. It was 3% in November, excluding volatile fresh food costs. <\/p>\n
The 0.75% rate is still low by most standards, but the BOJ has kept that rate near or below zero for years, trying to pull the economy out of a deflationary funk. Since the pandemic, most other central banks, like the U.S. Federal Reserve<\/a>, have raised rates to counter spiking inflation and then begun cutting them to help their slowing economies recover momentum. <\/p>\n Japan\u2019s own economy contracted<\/a> at a 2.3% annual rate in the last quarter, but improved business sentiment<\/a> and price pressures have led the BOJ to relent and raise rates. Here are some things to know about its decision.<\/p>\n Japan\u2019s interest rates rise while other countries\u2019 fall<\/p>\n Since Japan\u2019s economic bubble burst in the early 1990s, the central bank has kept borrowing costs low to encourage more spending by businesses and consumers. <\/p>\n Lower interest rates have also helped the central bank manage the country\u2019s massive national debt, which amounts to nearly triple the size of the economy. <\/p>\n As Japan\u2019s population has aged and begun declining, its economy has slowed and that led to deflation,<\/a> or falling prices due to weak demand. Even with cheap credit, investment has lagged, stunting economic growth. <\/p>\n In early 2013, the central bank launched what was dubbed a \u201cbig bazooka\u201d<\/a> of monetary easing, cutting interest rates and purchasing government bonds and other securities to help channel more money into the economy. When the COVID-19 pandemic struck, the benchmark interest rate was at minus 0.1%. The BOJ only began raising it in 2024,<\/a> the first hike in 17 years, after inflation stabilized above its target of about 2%. <\/p>\n A weaker Japanese yen has pushed inflation higher<\/p>\n The Japanese yen has weakened against the U.S. dollar and many other major currencies. So Japanese consumers and companies pay more now for imported food, fuel and other items needed to keep the world\u2019s fourth largest economy running. <\/p>\n The strong appetite for investing in dollar-denominated shares of companies linked to the artificial intelligence boom has also pulled money out of the yen and into dollars.<\/p>\n So inflation has risen faster than wages, squeezing household budgets and raising costs for businesses. <\/p>\n Higher interest rates will raise the value of the yen against the dollar, likely drawing investment into Japan seeking higher yen-denominated yields. That could push the yen higher, given that the BOJ has signaled it expects to continue raising rates. <\/p>\n \u201cThe BOJ\u2019s stance towards rate hikes reflects the fact that inflation is becoming entrenched,\u201d Kei Fujimoto, a senior economist at SuMi Trust, said in a commentary. \u201cIf drivers such as a further depreciation of the yen accelerate inflation going forward, it is possible that the pace of rate hikes will also increase accordingly.\u201d<\/p>\n World markets yawn<\/p>\n The planned rate hike was reported by Japanese media ahead of time, giving investors a head start on adjusting their portfolios. <\/p>\n Initially, the yen weakened after Friday\u2019s rate hike, as the dollar rose to 157 yen, nearly twice its level in 2012 and near its highest level this year. <\/p>\n