The Bank of Japan raised benchmark interest rates yesterday—following the general trend of centralized banks worldwide—stock and bond investors reacted negatively. Markets have settled today.
- The threat of inflation has kept central banks in the U.S. and Europe making hawkish moves. The U.S. Federal Reserve announced its seventh consecutive rate hike this year on December 15. The Bank of England and the European Central Bank have followed suit.
- The Bank of Japan (BOJ) made a surprise announcement on Tuesday and raised interest rates from 0.25% to 0.40% after months of holding out and not following the trend. It may raise as high as 0.50%.
- The Yen hasn’t suffered the same inflation as the dollar, and the BOJ has reinforced that the decision to hike rates is tied to the deteriorating bond market.
- The BOJ generally sets a target rate of zero for its benchmark bond yield and keeps interest rates lower, Wall Street Journal reports.
- Stocks dropped on the news yesterday, but have risen today in early trading.
Why it’s News
The hawkish movement came as a surprise, given that the BOJ runs a low-rate policy and that a move wasn’t expected at this time. The move has given the Japanese economy a small bump, though.
The Yen has seen a 3.9% rise in value since Monday’s closing value, reflecting yen and bank shares rising in response to the BOJ. The dollar-yen conversation rate decreased from one dollar buying 137 yen to 132 yen following the BOJ’s announcement.
“The bank said Tuesday’s moves would facilitate the transmission of monetary-easing effects, suggesting it didn’t want the decision to be interpreted as monetary tightening. The BOJ has made a small step toward an exit from monetary easing,” says The Wall Street Journal.
Japan’s inflation rate is only 3.8% compared to the U.S.’s 7.1%. China has similarly low inflation rates, and its central bank cut interest rates twice in 2022, against the general global trend.