Bank of Japan hikes interest rates by 25 bps to 0.5%, highest level since 2008

The Bank of Japan, the central bank of Japan, raised interest rates by 25 basis points (bps) to 0.5% on Friday, January 24, bringing them to the highest level since the 2008 global financial crisis. The move has marked highest borrowing costs in 16 years and could see a wider impact across the globe.

Following the development from the Bank of Japan, global markets retreated from the higher levels to trade lower on Thursday morning. The Japan's Nikkei index gave up all the morning gains of more than 400 points to trade with 100 points gain. The US futures also traded in red with Dow Jones futures now trading flat. The Japanese Yen also appriciated a little immidietly after the move towards 155 against the dollar.

The rate hike by the Bank of Japan was larely in line with the estimates as the central bank projected that inflation could reach to the levels of 2% in the second half of 2025. The Japan's core inflation surged to 16-month high levels of 3%, which prompted the central bank for this bold move.

Japan has been safe harbour for cheap capital as interest rates were near zero for longer period of time and currency depriciation gave double advantage for Foreign investors to raise money from Japan and invest elsewhere in the world.

Market participants and experts warn for a possibility of Yen carry trade unwinding as capital could move back to the Japan due to higher cost of capital than previously. A hike in the interest rates would diminish the margins in the yen carry trade as currency appreciates and gives negative return on the investment.

The NIFTY50 and SENSEX opened in green on Friday morning. The NIFTY50 traded 18 points higher at 23,222 and SENSEX jumped 100 points to trade at 76,520 levels at 9:30 am.