Japan's central bank hikes rates, signaling economic confidence but faces risks from previous market disruptions.
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The Bank of Japan raised its short-term interest rate to 0.5%, the highest since 2008, signaling confidence in stable inflation and rising wages. Governor Kazuo Ueda indicated further hikes may follow, though timing remains data-dependent. The yen strengthened after the announcement, while markets priced in another rate increase this year.
This policy shift comes with risks. A similar hike last summer led to a collapse in the carry trade—where investors borrow yen to fund higher-yield investments—triggering a global market correction. The BOJ was forced to reverse course, highlighting the precarious balance between tightening policy and financial market stability.
As external uncertainties, including trade tensions and global economic headwinds, persist, the BOJ faces a challenging path to normalize rates without destabilizing markets. For now, the bank aims to cautiously navigate its exit from decades of deflation.
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