Japan is raising rates again

Guy Kilty (0:02)

Japan's Central Bank raises its main interest rate to the highest level since 1995 It's World Business Express from the BBC World Service. I'm Guy Kilty.

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The Bank of Japan has raised its key interest rate for the second time in three months, pushing borrowing costs to their highest level in more than three decades. In a move that was widely expected, the Central Bank lifted its benchmark interest rate by 25 basis points to 1.25 percent, is highest since 1995, and suggested that more hikes could be on the way. Earlier, I spoke to the BBC's Tokyo correspondent, Kirumi Mori, on why the bank made the decision.

Kirumi Mori (0:56)

There are two main reasons. First is they want to cool inflation. The second is the yen. The yen is a big part of this, and it always has been.

A higher BOJ rate means a potentially stronger yen, and that means cheaper imports, which then means less inflation pressure. So it's really a chain here, but the rate does impact the currency and also inflation pressure that a lot of Japanese people today are feeling.

Guy Kilty (1:25)

And there's some saying that there are indications that there could be further rate rises in the future. Is that the picture that seems to be emerging?

Kirumi Mori (1:32)

Yeah, absolutely. So after the BOJ rate announcement, Governor Kazuo Ueda spoke to the press, and during it he said that he expects further hikes. He said the BOJ will continue to raise policy rates, and it's also become really important to stabilize the rate of price increases at a level around 2%. He also added that he believes this phase of policy has shifted to a new stage.

Guy Kilty (2:00)

Sayori Shirai, Professor of Economics at Keio University and a former Bank of Japan Policy Board member, said the extra costs from rising interest rates are compounding the cost of living increases people have felt from the falling yen.

Sayori Shirai (2:13)

So we are having four years, the inflation purely coming from yen's depreciation and commodity pricing, nothing to do with domestic economies. So actually people are suffering from this inflation. But then the Bank of Japan have to raise interest rate to cope with this excessive yen's depreciation. So it's kind of very difficult for people to understand why already they are suffering from this rising living cost and why they have to pay additional interest rate for mortgages and et cetera. So it's very challenging for the BOJ to explain this.

Guy Kilty (2:48)

Rob Aplin runs a carpentry business in Tokyo. He explained how the rate rise will affect him and his business.

Rob Aplin (2:54)

I mean, I'm only a small business, so obviously it affects me because everything's going to go up. So obviously it's going to affect me how I'm going to price out jobs. Japan's been in a 30 year cycle of deflation, and now we're coming into a cycle where we're going to have inflation and probably real wages will hopefully go up. The only problem is that with real wages going up, you also get everyday goods going up as well. So we could get into a vicious cycle there.

Guy Kilty (3:19)

Do you think it's going to mean you're going to have to pass on price rises to your customers?

Rob Aplin (3:23)

A hundred percent. I'll have to have lots of long chats and try and sweet talk, I suppose.

Guy Kilty (3:28)

We spoke to you back in June about the yen sinking to a 40-year low against the dollar. How have things been since then for you and how are you feeling then about the future in light of this interest rate decision?

Rob Aplin (3:37)

Japan's government are more interested in big companies like Toyota, Honda, and these people with the interest rates going up, they bring a lot of money back into Japan. So that's good for the big, big businesses. But for me, it's a big problem.

Guy Kilty (3:52)

What about you as an individual then living in Tokyo? What sort of effect do you think it might have?

Rob Aplin (3:56)

My mortgage is going to go up, everyday expenses are going to go up. So yeah, they're all issues we've got to kind of factor in when we in the next 12 months, six months, I suppose.

Guy Kilty (4:06)

Business owner Rob Applin in Tokyo. Now, Randip Samal is Deputy Fund Manager at M&G Investments. And Randip, normally when a central bank raises rates, the value of the currency increases too, but that didn't happen today.