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- Japan Interest Rates Hike | Central Bank Raises Rates To Tackle Inflation
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Interest rates in Japan have reached their highest level since 1995.
The Central Bank of Japan has increased interest rates from 1% to 1.25%. This is the highest level in the last 31 years. That means the loan has become expensive. The bank has taken this big step mainly to stop the rising inflation in the country and to manage its weakening currency ‘Yen’.
By the year 2024, interest rates in Japan were in minus (-0.1%), which meant that instead of getting interest on keeping money in the bank, reverse charges were deducted so that people did not save money but spent it freely in the market. Now the bank has increased the rates for the sixth time in the last two and a half years.
3 big reasons for increasing interest rates…
- To control inflation: When loans are expensive, people borrow less money from the market. This reduces the flow of money in the market and prices of goods decrease.
- To strengthen the yen: Japan’s currency ‘Yen’ was becoming very weak. Due to increase in interest rates, foreign investors will prefer to invest money in Japan, which will strengthen the yen.
- Middle East War: Oil and gas are becoming expensive due to war. Japan buys most of its energy from outside, so the risk of inflation in the country had increased.
America and Europe have also increased the rates
Like Japan, other big economies of the world are also making loans expensive to control inflation. Recently, the Central Bank of America has increased its interest rates for the first time in the last three years, while the European Central Bank (ECB) has also increased the lending rates this month.
Inflation rate in August was 1.7%
The core inflation rate in Japan for the month of August has been recorded at 1.7%, which is slightly lower than the 1.8% rate in July. This is close to the bank’s target of 2%. Inflation rate of 1.7% may seem low compared to countries like India, but it is a big change for the people of Japan.
In fact, prices in Japan were decreasing instead of increasing for the last 30 years. This is called deflation. Due to this, the people there had become used to getting goods at cheaper rates. In such a situation, when the prices of everything are continuously increasing, this has become a cause of concern for both the pockets of the common citizens and the government.
Yen reaches 40 year low
The value of Japan’s currency ‘Yen’ had become very low in the world market. In August, the value of the yen had fallen to its lowest level in the last 40 years. When a country’s currency becomes very weak, it becomes very expensive for that country to buy goods from outside.
To stop this decline, recently the governments of Japan and America jointly purchased the Yen. Earlier, Japan and America had jointly taken such a step in the year 2011, when Japan’s economy had faltered due to the earthquake and tsunami.
There was pressure to increase interest rates
US Treasury Secretary Scott Besant had also put pressure on the Bank of Japan to increase interest rates. He appealed to BOJ Governor Kazuo Ueda to raise rates to strengthen the yen. Usually, when a central bank increases interest rates, that country’s currency becomes more attractive to investors, thereby strengthening the currency.
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