Lowering Interest Rates, Or Raising Them?

Making moves

The pace of interest rate cuts has been the focus for much of the world, but in Japan, things are going in the opposite direction. The BOJ just hiked its key policy rate to its highest level in 17 years, continuing its hawkish stance after exiting an era of unconventional policy. It’s important to note that rates in Japan are still comparatively low, in a range of “around 0.5%,” but there are plans to keep pushing up borrowing costs toward levels seen in other major economies.

Backdrop: Japan had been mired in decades of weak prices and economic stagnation, and even as inflation impacted the globe in the aftermath of the COVID pandemic, BOJ policymakers largely viewed local price pressures as imported from elsewhere. That changed in 2024 as solid wage growth looked more permanent and the central bank became more confident in a “virtuous economic cycle” that would stimulate consumption and keep inflation stable. Even after exiting NIRP and massive monetary stimulus, the BOJ still feels that it is a ways away from a neutral rate, or a level that is neither cooling nor overheating for the economy.

The latest developments come as President Trump makes an aggressive push toward a new global era of cheap money. Wide-ranging tariffs are also a concern for trading partners of the U.S., including Japan, which could threaten growth, prices and currencies. The yen (USD:JPY) has already experienced a rapid weakening in recent years, even topping the ¥160 level vs. the dollar that is seen as requiring intervention.

SA commentary: “Short-term risks are significant considering issues such as the weak yen with appreciation pressure and shaky politics, but Japan presents significant opportunities amid normalization and corporate reforms in the long-run,” writes SA analyst Michael Ngan. “Equities are relatively cheap compared with global peers, but not exceptionally. Moving to 2025, structural themes such as reforms and normalization pathways will be on the watch of global investors.”