At its September policy meeting, the Bank of Japan raised its policy rate from 1% to 1.25%, bringing it into the neutral interest rate range. Long-term interest rates have remained in the 3% range, and the outlook is that growth expectations and uncertainty over fiscal management will determine whether the rise in interest rates is “good” or “bad.”
At its 17–18 September meeting, the Bank of Japan raised its policy rate by 0.25%. Since ending its negative interest rate policy, it had continued raising rates at a pace of roughly once every six months, but accelerated that pace to once every three months. The estimated neutral interest rate range is generally considered to be 1.1% to 2.5%, and this hike brought the policy rate into that range.
Long-term interest rates rose into the 3% range in the first half of September for the first time in approximately 30 years and have continued to hover around 3%. Against a backdrop of global inflationary pressures and demand for AI investment, the rate-hike cycle is expected to continue.
Two scenarios are being discussed: a “good rise in interest rates” and a “bad rise in interest rates.” The movement in long-term interest rates is explained as being determined by three factors: the real short-term neutral interest rate, expected inflation and the term premium. If rising growth expectations push up real interest rates, rates could stabilize at around 3% to 3.5%. If fiscal concerns intensify and the term premium expands, rates could rise to 4% to 5% or higher.
As Japan’s economy enters a phase in which the “quality” of rising interest rates is being called into question, four factors are expected to determine the outcome: growth strategy, technological innovation, fiscal discipline and supply and demand for government bonds. Future developments are said to depend not only on the government but also on the actions of companies and households, making them a focus of attention.