Japan Raises Interest Rates for Second Time Since 2007

The Bank of Japan (BoJ), the country’s central bank, has raised its benchmark interest rate to 0.25% from the previous range of 0%-0.1%.

It is the second time since 2007 that the Bank of Japan (BoJ) has raised short-term interest rates. In March 2024, the BoJ had raised interest rates from -0.1% to the range of 0%-0.1% — a rise for the first time since 2007. The decisions, both in March and July, were taken with a 7-2 majority. The latest interest rate range of 0.25% is the highest since the global financial crisis (GFC) during 2007-09. An official statement from the BoJ noted:

“Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity.”

When interest rates are in the negative, like it was in Japan from 2016 to March 2024, customers need to pay to make deposits in a bank. The strategy is meant to stimulate the economy as the public is encouraged to spend money rather than depositing it in the banks.

The central bank has now changed the gear to a tighter interest rate policy to address the weakness of the yen, the country’s national currency. The BoJ took the latest action after a two-day policy meeting. The rate hike follows senior government officials recently making some harsh remarks about the current state of Japan’s economy.

• Japan is the world’s fourth largest economy, but it has shrunk in two of the past three quarters.

• Japan's economy shrank 2.9% during the January-March 2024 quarter.

• Consumer price index (CPI) rose by a less-than-expected 2.6% in June 2024 year-on-year (YoY).

The policy board at the BoJ forecasted:

• Real gross domestic product (GDP) is expected to grow 0.6% YoY in the fiscal year (FY) 2024, 1% in FY 2025, and the same in FY 2026.

• The consumer price index or CPI (all items less fresh food and energy) is expected to rise 1.9% YoY during FY 2024, the same during FY 2025, and 2.1% during FY 2026.

The BoJ also said it will reduce the monthly outright purchases of Japanese government bonds (JGBs) to 2.9 trillion yen ($19.64 billion) per month in the January-March 2026 quarter. As per the March 2024 data, the amount of purchased JGBs stood at 5.7 trillion yen ($39 billion) per month. The bank said it will reduce the amount to purchase JGBs by about 400 billion yen each calendar quarter. Following the above announcements, the economic indicators reflected an upturn immediately:

• The Nikkei 225 index rose 1.49% to 39,101.82 points today.

• The yen (JPY/USD) first strengthened by 1% to 153.59 but fell to 152.14.

The U.S. Federal Reserve and the Bank of England are also set to announce their decisions on interest rates this week. Keep following the BitDelta blog to get the latest updates on finance and business.