The Bank of Japan (BOJ) announced on Jul. 31, 2024, that it will be raising interest rates to 0.25 per cent, Nikkei Asia reported.

The interest rate hike signals concerns about a weakening yen, as well as growing confidence that hitherto sluggish private consumption in Japan would pick up pace.

The interest rate increase, in theory, would bolster the yen.

CNBC reported that the yen eked out a gain of 0.8 per cent against the U.S. dollar following the rate hike announcement.

The rate hike might lead to a weakening of the Singapore dollar against the Japanese yen, though this remains to be seen.

The Singapore dollar has weakened since Jul. 11 against the Japanese yen, slipping to S$1 to 113.99 yen as of Jul. 31, 2024, according to Google Finance:

The BOJ said that it would be raising rates from between 0 per cent and 0.1 per cent to 0.25 per cent.

The move came as a surprise to economists and analysts, who thought the BOJ would hold off on an interest rate hike in July.

Separately, the BOJ announced a plan to ease off buying Japanese government bonds (i.e. Japanese government debt) by half, from 6 trillion yen (S$52.9 billion) per month to 3 trillion yen (S$26.4 billion) by 1Q2026.

Second interest rate hike

This would only be the BOJ's second interest rate hike since 2007.

Back in March 2024, the BOJ announced that it was ending its negative interest rate policy, in place since 2016.

Despite the interest rate hike, the yen had been steadily weakening due to the large interest rate gap between the U.S. dollar and the yen, making the yen less attractive to investors.

The yen was in freefall against the U.S. and Singapore dollar after the March interest rate hike, due to the strength of the greenback:

The latest BOJ announcement comes two days after the U.S. Federal Reserve stated that it was opening the door to interest rate cuts as soon as September.

If so, this would signal that the Federal Reserve's acknowledgement that price pressures in the U.S. have eased and inflation had come down, closer to its target of 2 per cent.

Top photo from Canva.