The Bank of Japan raised its benchmark interest rate by another quarter of a percentage point overnight Thursday into Friday, taking its policy rate up to 1.25%.
The move was widely expected by markets, continuing a gradual tightening path Japan's central bank has followed as the country has moved away from the near-zero and negative interest rate policies that defined its monetary policy for much of the past three decades. The decision was not unanimous. Two board members dissented from the increase, a reminder that opinion within the bank remains divided over how quickly to keep raising borrowing costs while Japan's economy continues to find its footing after years of deflation and slow growth.
What caught traders' attention on Friday was not the hike itself but the currency reaction. Rather than strengthening on the back of higher interest rates, as textbook economics might suggest, the yen weakened further against the dollar, with the dollar-yen exchange rate pushing higher through the session. That is a sign that markets had already priced in the rate increase and are instead focused on the wider gap that still exists between Japanese rates, even after this hike, and the higher rates now prevailing in the United States and other major economies following this week's Federal Reserve increase.
A weaker yen has mixed effects on Japan's economy. It tends to help the country's large exporters, whose goods become cheaper for foreign buyers, but it also raises the cost of imported energy and food, adding to inflation pressures that the Bank of Japan is trying to manage as it continues its slow return to more normal monetary policy after years of ultra-easy money.
Why did the yen fall even though rates went up?
The rate hike was already expected by markets, and traders are focused instead on the still-wide interest rate gap between Japan and countries like the United States.
Is 1.25% a high interest rate for Japan?
By Japan's own recent history it is notably high, since the country kept rates near zero or negative for roughly three decades before beginning to raise them.