In August, the prices of 642 food items will increase (according to Teikoku Databank). Amid a historic weakening of the yen, the Bank of Japan decided on an additional interest rate hike on July 31st. Japan will also be fully entering a “world with interest rates.” Meanwhile, on August 2nd, the closing price of the Nikkei Stock Average fell by the second largest amount since the day after Black Monday. What impact will interest rate hikes, falling stock prices, and exchange rates have on our lives? What will happen to home loans? We have compiled this information based on interviews with experts.

What is the relationship between the Bank of Japan’s interest rate hike and the weak/strong yen?

The keyword this time is “policy interest rate,” which is the interest rate at which the Bank of Japan, Japan’s central bank, accepts money from banks. On July 31, the Bank of Japan decided to raise its short-term interest rate target, which had been between 0% and 0.1%, to 0.25% as of August 1.

Hideyuki Araki, a senior researcher at the Resona Institute of Research, said, “This is coming sooner than we thought.” Araki’s view was that the Bank of Japan would raise interest rates only after it had determined that prices and wages were in a virtuous cycle and that real wages were at least in the positive.

At a press conference, Bank of Japan Governor Kazuo Ueda commented that he recognized the impact of the weak yen on prices as a major risk and that this was one of the reasons for the policy decision. In other words, the continued weakening of the yen appears to be the background to the interest rate hike. Governor Ueda also stated that if the economy and prices move as expected, interest rates will continue to be raised.

When it comes to the relationship between the Bank of Japan’s interest rate hikes and the yen’s depreciation and appreciation, the “interest rate differential between Japan and the United States” is said to be one of the reasons for the yen’s depreciation. Looking at the trends in the policy interest rates (upper limit) of Japan and the United States, in January 2022, there was not much difference between the policy interest rates of the United States and Japan. Since then, the Federal Reserve, the central bank of the United States, has been steadily raising interest rates, and there is now a large interest rate gap of 5.5% in the United States and 0.1% in Japan. As a result, it is more profitable to deposit money in an American bank than in a Japanese bank, and more profitable to invest in the United States than in Japan, so the dollar becomes stronger and the yen becomes less attractive. In other words, if Japan’s interest rates are lower than those of other countries, there will be a stronger movement to invest abroad, which will be one of the factors behind the depreciation of the yen.