Bank of Japan Raises Policy Rate to 1%
— The era of positive interest rates has now arrived in earnest —

Bank of Japan raises the policy rate by 0.25 percentage points, finally bringing it to 1%
Today, the Bank of Japan raised its policy interest rate by 0.25 percentage points. As a result, the policy rate has reached 1.00%, marking another step toward Japan’s return to a “world with interest rates.” Against this backdrop, I would like to offer my views on monetary policy.

BOJ likely to continue gradual rate hikes while keeping a close eye on financial markets
In conclusion, this rate hike can be regarded as a desirable policy move from the standpoint of containing inflation and curbing asset bubbles. Moreover, at a time when central banks around the world are generally maintaining a tightening bias in their policy management, this was also an appropriate decision in order to prevent further yen depreciation driven by interest rate differentials between Japan and overseas economies. Signs of easing tensions in the Middle East are also positive for the economy and stock prices, and can be seen as a supporting factor for the rate hike.
That said, careful attention must be paid to the pace of future rate hikes, and the BOJ should proceed while gauging a pace that does not adversely affect financial markets. In my view, the Bank is likely to raise rates by 0.25 percentage points every six months, with the policy rate reaching around 1.5% in the first half of 2027. At such a pace, the impact on financial markets should remain limited, while avoiding an excessive cooling of the economy.

What will be the impact on each sector?
Looking at the effects on each sector, I believe that for the household sector as a whole, higher interest rates will have a positive impact, supported by Japan’s ample household net assets. For the corporate sector overall as well, the negative impact is likely to remain limited. However, significant disparities in impact are likely to emerge. Within the household sector, the working-age generation, which tends to carry relatively larger debt burdens, may be adversely affected. In the corporate sector, small and medium-sized enterprises with heavy borrowings, as well as sectors such as real estate and retail, are also likely to face negative effects. Policy measures that take into account sectors vulnerable to the adverse effects of rising interest rates will therefore be required.
The government sector, however, is likely to suffer the greatest negative impact from rising rates. As rate hikes continue and long-term interest rates also keep rising sharply, the risk of a rapid increase in debt-servicing costs is mounting. At this pace, annual interest payments by around 2030 could rise to roughly ¥20 trillion, from around ¥10 trillion at present. There is little doubt that Japan has entered an era in which it can no longer postpone fiscal consolidation, as it has done for so long. The Japanese government should recognize that it can no longer rely on the ultra-low interest rate environment of the past in conducting policy.

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