TOKYO / LONDON (IT BOLTWISE) – The Bank of Japan is poised to raise interest rates to a 30-year high, despite the country’s ongoing economic weakness. The decision could strengthen the yen and curb inflation, but risks further weighing on the already weak economy.
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The Bank of Japan (BOJ) is facing a major decision that could impact financial markets worldwide. Despite Japan’s ongoing economic weakness, the BOJ plans to raise interest rates to their highest level in 30 years. This measure is part of efforts to continue the normalization of monetary policy that began last year. The expected interest rate of 0.75% would be the highest since 1995 and could strengthen the yen against the dollar.
The economic conditions in Japan are currently anything but stable. The latest revised GDP figures show that Japan’s economy contracted more in the third quarter than originally estimated. A decline of 0.6% quarter-on-quarter and 2.3% year-on-year highlights the challenges facing the country. Despite this weakness, a rate hike is seen as a near certainty, with market focus on the BOJ’s comments following the decision.
A central issue is the question of the neutral interest rate, which is intended to create a balance between inflation and economic growth. Gov. Kazuo Ueda has said it is difficult to pinpoint that rate, and BOJ estimates range from 1% to 2.5%. This uncertainty makes monetary policy management more difficult because the BOJ has to act without clear guidance. Experts expect that an updated estimate of the neutral interest rate may be released after Friday’s meeting.
The impact of a rate hike on the bond and foreign exchange markets is also very important. Should the BOJ address the yen directly, this could be interpreted as a clear limit for the currency. The yen has weakened by over 2.5% since November, partly due to the policies of Prime Minister Sanae Takaichi, who initially opposed interest rate hikes but has changed her stance. A rate hike would also increase bond yields and borrowing costs for the Japanese government, which recently passed the largest stimulus package since the Covid-19 pandemic.
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