Why the Move by Japan to Increase Its Interest Rates Has a Wider Impact Than One Can Imagine?
Japan increased its interest rate to 0.25% on Wednesday, July 31, 2024.
The rate had been near zero for decades as Japan was fighting deflation.
But this time, the Bank of Japan wants to strengthen the yen against the dollar. Most of its imports, like oil and food, are paid in USD.
By increasing its interest rate, Japan aims to make the yen more attractive to investors. The yen rose sharply before and after the decision.
This move again puts pressure on the USD, as Japan is one of the biggest foreign holders of US debt.
The high interest rates in the US had already put a lot of pressure on Japan, which for months now has been reducing its acquisition of US bonds.
The American Federal Reserve’s decision to maintain its interest rates unchanged forced the Bank of Japan to take action, sending a negative signal to the world.
Japan also has one of the highest debt-to-GDP ratios at 263%. This high public debt, mainly held locally, was manageable while interest rates were near zero. But as interest rates increase, the impact of this debt might become a heavy burden on Japan's shoulders.
The accumulation of negative signals is testing investors nerves especially when in response or taking advantage of the situation, big names are going all out bearish.
