▲ Bank of Japan
As the Bank of Japan (BOJ) implemented an additional benchmark interest rate hike today (the 18th), attention is focused on the background of the decision and the future pace of rate increases.
During its Monetary Policy Meeting held today, the BOJ raised its short-term policy rate by 0.25 percentage points (p), moving it from 1.0% to around 1.25%.
Previously, the BOJ ended its eight-year negative interest rate policy by raising rates in March 2024 for the first time in 17 years, and has since hiked rates five times.
After raising the benchmark rate from 0–0.1% to "around 0.25%" in July 2024, it increased it to "around 0.5%" in January of last year, and to "around 0.75%" in December of the same year.
Following an increase to "around 1%" in June, the BOJ implemented another 0.25 percentage point hike just three months later.
Compared to its previous gradual pace, the shortened intervals suggest the central bank is accelerating its monetary tightening policy in earnest.
◇ U.S. Pressure Amid Inflation Concerns Triggered by Oil and AI
The BOJ's sharply accelerated pace of rate hikes is analyzed to be driven by the weak yen, rising oil prices, and the resulting inflationary pressures.
As crude oil prices rose again due to worsening conditions in the Middle East, and prices of raw materials and machinery surged amid soaring demand related to artificial intelligence (AI), the BOJ has been guarding against the risk that the underlying inflation rate could significantly exceed its 2% target.
▲ A currency exchange office in Myeong-dong, Seoul, on the 18th.
Furthermore, the value of the Japanese yen has remained weak not only against the U.S. dollar but also against major currencies such as the South Korean won.
When the dollar-yen exchange rate surged to the 164 yen range last July, the U.S. and Japanese governments launched a joint foreign exchange market intervention at the end of that month to buy yen in an effort to correct the trend.
In addition, U.S. Treasury Secretary Scott Bessent stated following a meeting with BOJ Governor Kazuo Ueda on August 30, "We strongly support Japan taking decisive market and financial policy measures to address the significant undervaluation of the yen."
This was interpreted as the U.S. government effectively urging Japan to raise its benchmark interest rate.
Shifts in the global monetary environment are also closely related.
Recently, central banks in major countries including the U.S. and South Korea, as well as Japan, have turned hawkish in response to global inflationary pressures driven by rising oil prices.
The U.S. Federal Reserve (Fed) raised the upper limit of its benchmark interest rate by 0.25 percentage points from 3.75% to 4.00% at its Federal Open Market Committee (FOMC) regular meeting held on September 15–16.
The European Central Bank (ECB) also raised its deposit facility rate to 2.50%, and its main refinancing operations rate and marginal lending facility rate to 2.65% and 2.90% respectively, hiking each by 0.25 percentage points on September 10.
The Bank of Korea also raised its base rate by 0.25 percentage points from 2.75% to 3.00% on August 27.
It implemented rate hikes for two consecutive months amid concerns over accelerating inflation.
Considering these external environments, the widening interest rate gap with overseas markets could further fuel the depreciation of the yen, which is interpreted as another factor behind the BOJ's rate hike decision.
However, it remains uncertain whether this rate hike will actually halt the decline in the value of the yen.
Following the announcement today, the dollar-yen exchange rate briefly rose to the 157 yen range in the Tokyo foreign exchange market.
The exchange rate reaching the 157 yen range marks the first time in about two weeks since September 3.
In addition, as the U.S. Fed also raised its rates, the interest rate gap between the U.S. and Japan is still maintained at around 2.75 percentage points.
Consequently, analysts suggest that incentives to sell dollars and buy yen remain insufficient.
At the same time, due to these same reasons, dominant analyses suggest that the possibility of an immediate, large-scale unwinding shock of the yen carry trade (borrowing low-interest yen to invest in high-yield overseas assets) being reignited is small.
The trigger most feared by global financial markets when the BOJ raises interest rates is the liquidation of yen carry trade funds.
A prime example cited is early August 2024, when the BOJ's rate hike coincided with expectations of a rate cut by the U.S. Fed, causing the yen to briefly surge 3.3% against the dollar and triggering a simultaneous crash in global stock markets, including South Korea's KOSPI.
Because the interest rate gap with the U.S. has not narrowed significantly, investors' incentives for large-scale liquidations of the yen carry trade are expected to be limited.
◇ Expectations of "Additional Hikes by December" Amid Internal Disagreements
As this hike was already anticipated by the market, the key question is how much faster and higher the BOJ will be able to raise rates going forward in response to the weak yen and rising inflation.
Immediately following the monetary policy meeting in July, Governor Ueda warned at a press conference, "It is entirely possible to accelerate the pace of interest rate hikes."
The Nihon Keizai Shimbun (Nikkei) reported that with the rate hike cycle shortened to three months, even within the BOJ, this is being accepted as an effective acceleration of tightening.
According to think tanks such as Totan Research, the market sees about a 90% probability that the BOJ will implement an additional rate hike by the December meeting.
However, conflicting currents have been detected among BOJ policy board members regarding the acceleration of tightening.
Policy Board Member Masuda Kazuyuki remarked in a recent speech, "Governor Ueda's remarks in July were about a single upcoming hike and can hardly be seen as signaling consecutive hikes thereafter."
On the other hand, Policy Board Member Takata Hajime stated on September 2, "Considering that overseas central banks are shifting toward rate hikes, we need to respond agilely without being bound by a fixed interval or magnitude of rate increases."
One of the future variables is whether the Japanese government will intervene.
If benchmark interest rates continue to rise, the government's burden of repaying national debt interest will swell, and the risk of bankruptcy for households and small-to-medium-sized enterprises reliant on loans will increase.
For this reason, some observers predict that political circles, including the cabinet of Sanae Takaichi, may strongly suppress additional rate hikes by the BOJ out of concern over a domestic economic slump and a drop in approval ratings.
(Photo: Yonhap News)
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