The Bank of Japan concluded its monetary policy meeting on the 18th, deciding to raise its policy rate from the current approximately 1.0% to about 1.25%. This marks the central bank's second rate hike in three months, following a move in June, and pushes the policy rate to its highest level since 1995. So why is the BOJ raising rates now, and what effects can be anticipated? What economic challenges is Japan currently confronting?

Inflation and currency pressures are prompting the BOJ to tighten policy. Data released by the Ministry of Internal Affairs and Communications on the 18th showed that the core consumer price index, excluding fresh food, rose 1.7% year-on-year in August, slightly below July's 1.8% increase but still close to the BOJ's 2% inflation target. Economist Saito Taro at Nissay Basic Research Institute noted that as the effects of utility subsidies fade, core CPI growth could surpass 2% in October and reach 3% by the end of fiscal year 2027 in March, indicating medium-term upward pressure on inflation. Furthermore, with the European Central Bank and the Federal Reserve raising rates, the BOJ's inaction would widen the interest rate differential between Japan and the U.S., intensifying depreciation pressure on the yen.

What results can this rate hike reasonably produce? The gap in interest rates with the U.S. remains wide, suggesting the hike's impact will be quite limited. Zhou Xuhai, an assistant researcher at the Institute of Japanese Studies at the Chinese Academy of Social Sciences, stated that the short-term effect of this round of rate increase is expected to be minimal, as the yen fell rather than rose following the decision, with markets generally viewing the 25 basis point hike as fully priced in. Even after the increase to 1.25%, Japan's rate remains far below the Fed's 3.75% to 4% range. Zhou added that markets anticipate one more 25 basis point hike by the Fed within the year, while the BOJ's next move may not occur until 2027, implying the BOJ's tightening pace lags well behind the Fed's, keeping the yen under depreciation pressure in the medium term. On the domestic front, higher rates would push up corporate borrowing costs and variable-rate mortgage payments, adding strain on businesses and households and dampening consumption and investment that are already weak.

What economic difficulties is Japan currently facing? The high-level government's push for military expansion to stimulate the economy has created a policy loss scenario. Japanese economist Kusakabe Kazuhide expressed that Japan cannot rely on enlarging defense spending or supporting the defense industry as a means to revitalize the economy, deeming such militaristic expansion routes incapable of bringing genuine prosperity and stability. He called the approach of boosting defense spending to revive the economy misguided and nearly irrational, suggesting that Japan's peace and stability should instead be grounded in building friendly relations with neighboring countries, not military buildup. Zhou Xuhai described Japan's economy as ensnared in a classic squeeze, where persistent high inflation coexists with stagnant consumption growth. Meanwhile, the economic agenda of the Ishiba cabinet has worsened the situation. The government's push for large-scale fiscal expansion and tax cuts clashes with the BOJ's forced monetary tightening, creating an inherent conflict in policy directions. With government debt levels exceeding 200% by multiple measures, a rising tide of small business bankruptcies, and deepening structural issues such as an aging population, labor shortages, and industrial hollowing out, Japan's economy faces the risk of stagflation characterized by no-growth inflation.