On January 24, 2025, the Bank of Japan (BOJ) officially announced a hike in its benchmark interest rate from 0.25% to 0.5%. This is a significant move that marks the highest interest rate Japan has achieved in 17 years, since the global financial crisis in 2008. Here are more details about the decision:

1️⃣Background of Interest Rate Increase

▶️Policy Meeting

The hike came after a two-day policy meeting, which saw eight members vote in favor and one against. BOJ Governor Kazuo Ueda said the decision was based on improving economic conditions and expectations of broader wage increases among Japanese companies.

2️⃣Impact of Interest Rate Increases

▶️Yen Exchange Rate

Following the announcement, the yen strengthened about 0.5% to 155.32 per US dollar, indicating a positive market reaction to tighter monetary policy.

▶️Bond Yield

The yield on Japan's two-year government bonds also rose to 0.70%, the highest level since October 2008.

3️⃣Reasons Behind the Increase

▶️Inflation and Wages

The BOJ anticipates that inflation will remain stable around its 2% target, driven by wage increases expected in annual negotiations. Governor Ueda stressed that despite global uncertainties, domestic conditions have shown enough improvement to support this decision.

▶️Gradual Strategy

The BOJ plans to gradually raise interest rates toward the 1% range, which is considered a balanced level to maintain economic growth without triggering excessive inflation.

▶️Market Reaction

Tokyo stocks reacted cautiously after the announcement, with the Nikkei 225 index falling slightly. Investors appear to be waiting for further comments from the BOJ on future interest rate policy.

💡The rate hike reflects the BOJ's strategic move in response to improving economic conditions and expectations of sustainable growth in Japan. This decision is expected to provide further stability in the domestic economy while still taking into account existing global dynamics.

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