Interest rate increase expectations in global markets are not limited to the United States alone. Speculations are increasing that the Bank of Japan may consider increasing interest rates, especially due to the ongoing war in Iran. Investors in Japan, which is under inflation pressure, are pricing that the bank may increase interest rates at its April meeting.
Interest rate increase is on the agenda in Japan
Data compiled by Bloomberg show that the possibility of an increase in the Bank of Japan’s benchmark interest rate at the meeting on April 28 is priced at around 69 percent. In the summary of the bank’s last policy meeting, some members had brought forward a stronger interest rate increase, drawing attention to the impact of the conflict in the Middle East and the resulting inflation on Japanese society. It is also stated that current data on the economy and signals from the market will be taken into account in the decision-making process.
The US Federal Reserve’s interest rate hike decisions have recently put pressure on risky assets. Bitcoin and other cryptocurrencies may also face selling pressure due to such decisions. The Bank of Japan has played a role in keeping borrowing costs low on a global scale by following an ultra-low interest policy for a long time. Investors are borrowing in low-interest Japanese yen and turning to higher-yielding markets, supporting demand for risky assets.
Impact on global markets and export risks
Japan’s move towards tightening could reverse capital flows and impact markets around the world. The Central Bank increased the interest rate from -0.1% to 0.75% in the last two years and ended its huge asset purchase program. Despite this, the interest rate in the country is still far below the 3.5% level in the USA.
The deepening tension in the Middle East may bring new waves of price hikes and imported inflation in Japan. In economies based on energy imports, the rise in oil and natural gas prices can lead to accelerated inflation. The Bank of Japan evaluates that the increase in energy prices opens more room for interest rate increases depending on the process.
However, the decision to increase interest rates brings up new risks for public finances in Japan. The country’s debt/GDP ratio has reached 240%, one of the highest levels in the world. This means that the government’s borrowing cost may increase rapidly as interest rates rise. Investors draw attention to the pressures that may occur on the financial structure in such an environment.
The Bank of Japan stated in its policy document, “Our decision will be based on economic data and market observations.”
According to economists, Japan currently faces two difficult choices. An increase in interest rates may lead to an increase in government bond yields and new discussions about debt sustainability. On the other hand, if the low interest policy is insisted on, the Japanese yen may lose value rapidly and this may increase inflation.
Recent fluctuations in the foreign exchange market reveal the pressure in Japan. The Japanese yen experienced the weakest period of both the year and recent years, falling to 160 against the US dollar. The currency has lost 54 percent of its value since 2021.
