Japan’s central bank increased interest rates on Wednesday for the second time in almost two decades in an effort to stop the yen’s decline versus the US dollar.
The bank recently increased interest rates in March, marking the first increase since 2007. The target policy rate was raised from a range of 0.1 to 0.25 percent, a move that could also lessen the impact on consumers of having to pay more for imported necessities like food and electricity.
This move was widely anticipated, as the yen fell below 152 in value against the dollar both before and after Wednesday’s decision. The yen’s recent decline to 160 yen to the dollar has caused growing concerns for the world’s fourth-largest economy, where it contracted in two of the last three quarters. There are hints that Japanese consumers’ purchasing power has been constrained by the weak yen.
Governor of the Bank of Japan Kazuo Ueda told reporters that despite concerns about consumer spending maintaining steadily as prices increased, action was taken because the Japanese economy had a relatively strong base with moderate price increases as well as wage increases.
He also mentioned that the policy interest rate will continue to increase depending on how the economy performs and how the most recent rate increases may impact pricing and economic activity, without giving specific dates.
“In the long term, we think that adjusting longtime extremely low interest rates shouldn’t be rushed, and overall risks can be reduced,” he said.
However, the Bank of Japan also stated that it anticipates real interest rates to stay “significantly negative” and that the “economic activity will continue to be firmly supported by accommodating financial conditions.”
According to central bank predictions, the core inflation rate is expected to hit 2.5% by the end of the 2024 fiscal year and “around 2%” for the 2025 and 2026 fiscal years.
Article by Lena Ndolo
