The Bank of Japan has made a historic move by raising the interest rate to its highest level in 31 years. With this increase, the interest rate rose from 1% to 1.25%, marking the end of the country's decades-long policy of low interest rates.
Historic Changes in Monetary Policy
This decision marks the sixth interest rate increase in about two and a half years and comes at a time when central banks in many other countries have also raised interest rates due to rising energy prices and inflation. On Wednesday, the U.S. Federal Reserve raised the base interest rate for the first time in over three years, and the European Central Bank had also increased borrowing costs.
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The Bank of Japan began the process of increasing interest rates in 2024 and has raised the rate six times during this period to reach a level closer to other major economies. As interest rates rise, acting as a contractionary monetary policy, the value of the yen typically strengthens, as it becomes more attractive to traders.
Economic and Social Challenges
Laleh Akoner, a market analyst at the investment firm eToro, points out that "one of the last sources of ultra-cheap money in the world is disappearing." Japan faces multiple economic challenges, including the ongoing depreciation of the yen, rising prices, and a shrinking workforce.
Official statistics released before the announcement of the interest rate increase showed that inflation fell to 1.7% last month. However, this rate is still close to the central bank's two percent target. Although Japan's inflation rate is not high by international standards, rising prices are considered a relatively new phenomenon in the country's economy.
Global oil and gas price fluctuations this year due to the war in the Middle East, particularly in the Strait of Hormuz, have disrupted supply and left Japan, as an energy-dependent country on the Middle East, highly vulnerable to these disruptions.
In August, the yen reached its lowest level in 40 years, prompting Tokyo and Washington to take joint action to stop the yen's decline. This intervention is the first of its kind since 2011 and reflects concerns about the economic stability of the country.
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