This Friday, the Bank of Japan is expected to announce a 25 basis point interest rate hike, a decision that will undoubtedly become the focus of global financial markets. This is not only the largest rate adjustment in Japan since 2007 but could also have far-reaching effects on the global economy. So, why is Japan's interest rate hike attracting so much attention?

1. Background and Reasons for Japan's Rate Hike

For the past three years, Japan's inflation rate has consistently exceeded the Bank of Japan's target of 2%, which is clearly a challenge for a country long troubled by deflation. At the same time, the continued weakness of the yen has further raised import costs, putting significant pressure on domestic consumers and businesses. Therefore, the decision facing Bank of Japan Governor Kazuo Ueda and his team is no longer "whether to raise rates," but rather "how to raise rates to minimize market turbulence."

In addition to domestic factors, the global economic environment has also provided impetus for Japan's rate hike. The International Monetary Fund (IMF) recently raised its global economic growth forecast for 2025, but the complexity of global markets has also increased the difficulty of policy implementation. Particularly, Japan's export-oriented economy needs to adjust internal demand through interest rate policy in response to external risks (such as trade frictions and policy uncertainties).

2. Market Impact of Last July's Rate Hike

In July of last year, the Bank of Japan unexpectedly raised interest rates, coupled with weak U.S. employment data as a "double whammy," which directly led to severe turbulence in global markets. As soon as the rate hike news broke, the Japanese stock market plummeted, with the TOPIX and Nikkei 225 indices both entering bear markets, triggering a halt in government bond futures.

Moreover, the cryptocurrency market was not spared. BTC fell over 12% that day, while ETH plummeted nearly 24%, leading to a massive liquidation of long positions and a rapid spread of panic. In the global market, U.S. and European stocks also experienced significant corrections, with the S&P 500 and Nasdaq indices both declining sharply, severely impacting investor confidence.

The storm from last summer undoubtedly left a deep impression on market participants. Therefore, although the expectation of this rate hike has been repeatedly signaled by the Bank of Japan, the market still worries whether a similar chain reaction will occur again.

3. Rate Hike is Not Just a Japanese Issue

1. Domestic Market in Japan

For the Japanese stock market, a rate hike may bring short-term pressure. Particularly, industries that heavily rely on a low-interest-rate environment (such as real estate and financial institutions) may face adjustment pressures. However, a rate hike could also strengthen market confidence in Japan's economic recovery, boosting long-term investor expectations.

2. Foreign Exchange Market

The fluctuation of the yen's exchange rate is the most direct manifestation of this rate hike. Since Governor Ueda hinted at a possible rate hike last week, the yen has already rebounded. If the rate hike is implemented, the appreciation of the yen may continue, which could impact export-oriented companies.

3. Global Market Spillover Effects

As the world's third-largest economy, Japan's monetary policy adjustments have spillover effects on international markets. The following aspects are worth noting:

• U.S. Stocks and Bond Market: When Japan raised rates last year, U.S. bond market yields surged, leading to selling pressure on tech stocks and high-growth companies. If a similar situation occurs again, U.S. stocks may face short-term volatility.

• Cryptocurrency: Reflecting on last year's sharp declines in BTC and ETH, the cryptocurrency market's sensitivity to interest rate changes cannot be ignored. A rate hike in Japan may trigger a rise in risk-averse sentiment, leading to capital flowing out of high-risk assets.

• Commodities: The appreciation of the yen may suppress Japan's demand for raw material imports, thereby affecting global commodity prices.

4. The Far-Reaching Significance of Japan's Rate Hike on the Global Economy

1. The "Game Changer" for Interest Rates

For a long time, Japan's interest rate level has been among the lowest in the world, and its loose monetary policy has served as a reference for other countries. This rate hike may mark Japan's gradual move towards policy normalization. This change could influence the decisions of other central banks. For instance, if Japan manages to bring down inflation while maintaining economic growth through rate hikes, other economies may also consider similar policies.

2. Reallocation of Capital Flows

As Japan's interest rates rise, global investors may reassess their capital allocations, directing more funds towards the Japanese market. This will create competitive pressure on capital inflows to other economies.

3. Chain Reactions in Asian Markets

As the core of the Asian economy, changes in Japan's monetary policy may have ripple effects on neighboring countries. For example, economies like South Korea and Singapore, which are highly dependent on the Japanese market, may adjust their policies in response to changes in the external environment.

5. The Next Move of the Bank of Japan

According to analysis from Mizuho Securities, after this rate hike, further increases may experience a longer interval, especially considering that Japan will hold a House of Councillors election in July 2025, where political factors may affect policy flexibility. Meanwhile, the IMF expects Japan to raise rates twice in 2025 and twice again in 2026, indicating that the market may need to prepare for a longer-term rate increase cycle.

Governor Ueda's statements will undoubtedly be key signals for the next policy steps. The market will closely monitor his remarks on the future pace of rate hikes and his assessment of Japan's economic growth and inflation targets.

Conclusion

The expectation of Japan's rate hike this Friday is not merely an economic event but a far-reaching global economic game. From Japan's inflation pressures to the interconnected effects on global markets, the rate hike may cause turbulence in stock markets, foreign exchange, cryptocurrencies, and commodity markets. Investors should be sure to manage risks and guard against severe volatility.

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