In short:
The Bank of Japan today increased rates to 1.25 per cent, in a widely anticipated move to counter inflation.
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Bank → increase → inflation
Inflation in Japan is currently sitting at close to 2 per cent.
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Inflation → sit → cent
It comes on the back of a rate rise in June, which bumped rates up to 1 per cent.
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which → come → cent
Japan was the country that inflation forgot.
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inflation → forget → that
But after almost 30 years of 0 per cent interest rates, things are changing.
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things → change → rates
The Bank of Japan today increased rates to 1.25 per cent in a widely anticipated move to counter inflation fuelled by high energy costs.
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Bank → increase → costs
It comes on the back of a rate rise in June, which bumped rates up to 1 per cent, the highest rate Japan has seen since 1995.
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Japan → come → 1995
Another rise, just three months later, marks the shortest time between increases since 1990.
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rise → mark → 1990
In announcing the decision, the Bank of Japan pointed to the situation in the Middle East, growing demand for AI products, and exchange rate fluctuations.
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Bank → announce → products
Inflation in Japan is currently sitting at close to 2 per cent, but the central bank is concerned about it potentially rising further.
While that may seem low by Australian standards, macroeconomist Fujiwara Ippei, a professor at Keio University and the University of Tokyo, said even 2 per cent inflation was "maybe shocking" for some people in Japan.
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inflation → sit → Japan
"Two per cent is not so large, but we are so used to 0 per cent," Professor Fujiwara said.
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Fujiwara → say → cent
Interest rates in Japan were aggressively cut in the 1990s in the wake of the country's asset bubble burst in the 1990s and the period of low growth that followed.
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that → cut → growth
In 2013, the Bank of Japan set a goal of a stable 2 per cent inflation to pull the country out of deflation.
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Bank → set → deflation
A range of monetary policies, including increased money supply and negative interest rates, were used to encourage spending.
But the current inflation is being driven by supply shocks — rising import and production costs.
Inflation started increasing in 2021 on the back of the COVID-19 pandemic and then the wars in Ukraine and the Middle East, at times edging toward 3 per cent.
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Inflation → include → cent
In 2024, the Bank of Japan began a program of gradual rate rises to "normalise" the economy.
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Bank → begin → economy
Professor Fujiwara said "a zero-inflation norm is really tricky" because people got used to nominal prices for things like lunch.
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people → say → lunch
"The price of lunch didn't change [from] when I was a university student 30 years ago," he said.
"So suddenly we see the increase, so therefore the people are really frustrated."
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people → change → increase
With inflation persisting and Japan's rates so low, the prevailing market view appears to be that the hikes will continue after today.
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hikes → persist → today
Washington's watchful eye
Japan's central bank will also be keen to try to support the yen, which recently hit a 40-year low against the US dollar, prompting joint yen-buying intervention from the US and Japan.
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which → try → US
US Treasury Secretary Scott Bessent defended the move by saying a stronger yen was "better for American exporters" and meant the Japanese government did "not have to sell US assets".
"I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what … what Japanese policymakers are going to do," he said last week.
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he → defend → what
The US Federal Reserve voted on Wednesday, local time, to raise rates to between 3.75 and four per cent, and the European Central Bank announced an increase last week.
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Bank → vote → increase
The depreciated yen is also adding to inflation by increasing the cost of imports.
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yen → depreciate → imports
The decision about rates has implications outside the country, as traders often borrow cheaply in Japan and invest the money into higher-yielding assets elsewhere.
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traders → have → assets
Professor Fujiwara, who worked at the Bank of Japan for almost two decades, said the overt pressure to raise rates from the US was "quite unusual", but he believed the Bank of Japan would have made the decision to raise today's rate regardless.
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Bank → work → rate
"But if there is further pressure from the United States — it's important for the central bank that they are making a decision independently," he said.
"
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he → be → decision
They don't want to have some impression that their decision is influenced by the government or influenced by a foreign government."
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decision → want → government
He said the increase to 1.25 per cent today was "reasonable" and if it had not happened, the Bank of Japan would risk sending the wrong sign to the market.
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Bank → say → market
"Bank of Japan may be confident, but I'm not so sure about whether the current 2 per cent inflation level can persist or not because of the sluggish real-wage developments," he said.
"And also, when they increase the interest rate to fight inflation, they need to worry about the impact to the government bond market."
More than 100,000 people aged over 100 in Japan
At Jizō-dōri, a shopping strip in Tokyo colloquially known as "Granny's Harujuku" because of its popularity with the older generation, shoppers
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they → persist → generation
told the ABC they were feeling the pinch of inflation.
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they → tell → inflation
Yoshikawa san, 69, said she has noticed price rises on everyday items like detergent and food.
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she → say → detergent
"I can't get by on my pension alone, so I'm doing part-time work," she said.
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she → get → work
The amount I receive just isn't enough."
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I → receive → ?
She is far from alone, with many inside Japan calling for further increases to pension rates to keep up with the cost of living.
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many → call → living
The Japanese government will cut a tax on food for two years from next April to help people, but the decision has sparked concern that it risks creating a budget shortfall.
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it → cut → shortfall
The Japanese government is pushing an expansionary fiscal policy — using public spending and cuts taxes to stimulate economic growth, which would then reduce the debt-to-GDP ratio.
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which → push → ratio
But analysts say its success will hinge on market confidence, and without that, it could trigger increases in long-term interest rates and a weakening of the yen.
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it → say → yen
And inflation is not the only fiscal challenge Japan is facing.
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Japan → face → ?
This week Japan reported there are now more than 100,000 people in the country who are more than 100 years old.
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who → report → country
The high rate of centurions is a credit to the population's health, but it also speaks to Japan's aging society, which will add to the financial pressure the country is facing.
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country → speak → pressure
"What is worrisome in the future is that … we are an aging society, but we will enter the super-aging society," Professor Fujiwara said.
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Fujiwara → age → society
…and 3 more, not listed.
The Aporia
