Japan raises interest rates, yen exchange rate rises!

On January 24, the Bank of Japan announced after a two-day monetary policy meeting that it would raise the policy rate by 25 basis points from 0.25% to 0.5%. This is the third rate hike by the Bank of Japan since March 2024, and Japan’s policy rate has reached its highest level since October 2008.

The Bank of Japan stated in its interest rate resolution that the Bank of Japan’s policy committee voted 8 to 1 in favor of the rate hike. The Bank of Japan believes that it is appropriate to adjust the degree of monetary policy easing from the perspective of achieving the 2% inflation target in a sustained and stable manner. The Bank of Japan pointed out that with the continued growth of Japanese workers’ wages, inflation has gradually moved towards 2%. On the same day, the Bank of Japan also comprehensively raised its inflation expectations for fiscal years 2024 to 2026: the expected increase in the core consumer price index (CPI) for fiscal year 2024 (April 2024 to March 2025) was raised from 2.5% to 2.7%, the expected increase in the core CPI for fiscal year 2025 (April 2025 to March 2026) was raised from 1.9% to 2.4%, and the expected increase in the core CPI for fiscal year 2026 (April 2026 to March 2027) was raised from 1.9% to 2.0%. The Bank of Japan pointed out that after the latest policy interest rate adjustment, the loose financial environment will continue to strongly support economic activities.

In addition, the Fed’s previous interest rate hikes also had an important impact on the Bank of Japan’s monetary policy decisions. The widening gap in policy interest rates between the United States and Japan has put the yen under tremendous depreciation pressure, so the Bank of Japan chose to raise interest rates to narrow the interest rate gap between the United States and Japan, thereby stabilizing the yen exchange rate.

After the announcement of the rate hike, the yen rose against the US dollar. As of press time, it has recovered the 156 mark and hovered around 155.57 yen to the US dollar. Some analysts pointed out that the rate hike decision has had a positive impact on the yen exchange rate. The yen exchange rate against the US dollar has risen to a certain extent this week. The official announcement of the rate hike decision has further promoted the appreciation of the yen.

Regarding the future monetary policy direction, the Bank of Japan said it will pay close attention to changes in the economy and financial markets and make corresponding adjustments based on actual conditions. The Bank of Japan emphasized that if the economy and inflation continue to improve, it will continue to raise the policy interest rate and adjust the degree of monetary easing.

In this regard, several analysis agencies pointed out that the Bank of Japan is expected to continue to raise interest rates. Foreign exchange analysts at the Commonwealth Bank of Australia said that the Bank of Japan will further raise interest rates in the coming months, and it is expected that the next rate hike of 25 basis points will be in July, and another rate hike will be in December, bringing the policy rate to 1.0%. Foreign exchange analysts at Nomura Securities in Japan also said that the Bank of Japan will further tighten monetary policy, but will keep interest rates unchanged for at least the next six months. Compared with the last time, this rate hike took six months. The Bank of Japan will be more cautious from now on as it carefully assesses the economic situation and the impact of rate hikes. If it raises rates early, it will most likely be due to the continued depreciation of the yen.