Written by The Banking Post
Interest rates in Japan are set to rise. It is expected that the Bank of Japan (BOJ) will announce an interest rate hike next Friday, which would be the highest in the past 30 years. There are concerns that this move could further increase volatility in the country’s debt market.
In recent weeks, yields on Japanese government bonds have risen due to investor concerns over Prime Minister Sanae Takaichi’s fiscal discipline. Meanwhile, the Japanese yen has weakened further against the US dollar.
Typically, when a central bank raises interest rates, bonds become more attractive. Although bond prices fall, yields increase as a result.
Japan’s economy contracted by 0.6 percent in the third quarter of this year. However, BOJ Governor Kazuo Ueda told the Financial Times last week that the impact of US tariffs has not been as severe as feared. According to him, US companies are bearing the burden of the tariffs themselves, and the impact has not yet significantly reached consumers.
Meanwhile, inflation in Japan remains above the central bank’s 2 percent target. In October, the country’s core consumer price index rose by 3 percent.
In a note, BMI, a subsidiary of Fathom Solutions, stated that policymakers understand that the window for raising interest rates is limited. They must take this step before global economic conditions worsen.
Highest interest rate since 1995
Most economists surveyed by Bloomberg believe the Bank of Japan may raise its key interest rate from 0.5 percent to 0.75 percent. If implemented, it would be the highest interest rate in Japan since 1995.
After maintaining a negative interest rate policy for many years, Japan began raising rates for the first time in March 2024. While Japan’s central bank is raising rates, the US Federal Reserve is moving in the opposite direction—cutting interest rates.
This decision is extremely important for Japan’s first female prime minister, Sanae Takaichi. A rate hike would help control inflation. Takaichi does not want to face the same situation as her predecessor, Shigeru Ishiba, who suffered a major electoral setback due to public anger over rising prices.
Last week, Japan’s lower house approved an additional budget of 18.3 trillion yen (118 billion USD). A large stimulus package has been announced to ease the financial burden on ordinary citizens.
More than 60 percent of this massive government spending will come from borrowing. As a result, new concerns have emerged in the market regarding the health of Japan’s financial sector. According to the International Monetary Fund (IMF), Japan has the highest debt‑to‑GDP ratio among major economies. This year, its debt may reach 232.7 percent of GDP.
The negative impact is already visible in the market. At the beginning of December, yields on 30‑year bonds reached a record high, while yields on 10‑year bonds climbed to their highest level in 19 years.
Takahide Kiuchi, an economist at the Nomura Research Institute, said these factors will undermine the effectiveness of the government’s economic stimulus package and harm long‑term market stability. This, he said, is the main weakness of the current administration’s fiscal policy.
Source: AFP
