Japan’s interest rate at its highest in 31 years:Central bank raises rates from 1% to 1.25% in bid to tackle inflation and falling yen

Japan’s central bank has raised interest rates from 1% to 1.25%. This is the highest level in 31 years. In other words, loans have become more expensive. The bank has taken this major step mainly to curb rising inflation in the country and support its weakening currency, the yen. Until 2024, interest rates in Japan were in negative territory (-0.1%), which meant that instead of earning interest on money kept in the bank, people were charged so that they would not save money but spend freely in the market. The bank has now raised rates for the sixth time in the past two and a half years. Three major reasons for raising interest rates… The US and Europe have also raised rates Like Japan, other major economies around the world are also raising borrowing costs to control inflation. Recently, the US central bank raised its interest rates for the first time in three years, while the European Central Bank (ECB) has also raised borrowing rates this month. Inflation stood at 1.7% in August Japan’s core inflation rate stood at 1.7% in August, slightly lower than the 1.8% recorded in July. This is close to the bank’s 2% target. Although an inflation rate of 1.7% may seem low compared with countries such as India, it represents a major change for people in Japan. In fact, prices in Japan had been falling rather than rising for nearly 30 years. This is known as deflation. As a result, people there had become accustomed to getting goods at increasingly lower prices. Now that the prices of everything are continuing to rise, this has become a source of concern for both ordinary citizens and the government, putting pressure on household finances. Yen falls to a 40-year low The value of Japan’s currency, the ‘yen’, had fallen sharply in global markets. In August, the yen’s value dropped to its lowest level in 40 years. When a country’s currency becomes very weak, buying goods from abroad becomes very expensive for that country. To halt this decline, the governments of Japan and the United States recently joined forces to buy yen. Before this, Japan and the United States had taken such a step together in 2011, when an earthquake and tsunami in Japan caused its economy to falter. Pressure to raise interest rates US Treasury Secretary Scott Bessent had also put pressure on the Bank of Japan to raise interest rates. He had appealed to BOJ Governor Kazuo Ueda to increase rates to strengthen the yen. Usually, when a central bank raises interest rates, the country’s currency becomes more attractive to investors, which strengthens it.