What does the Bank of Japan increasing its interest rate from .25% to .5% mean and why is it causing panic in the markets?

Question

I’m no good at economics lol

In: 4812

Answer 1

The interest rate determines how much money can be borrowed. Oftentimes when families want to buy a house, or buy shares, or when a company wants to buy new equipment, they’ll borrow money from the bank at some interest rate – the higher the interest rate, the more expensive it is to borrow, hence less overall borrowing means less overall spending on those assets. The BoJ is where the banks borrow their money from, so when the BoJ raises interest rates, rates increase for everyone in Japan. The lower spending on assets means the price of them will drop (think price = spending/quantity). This fall in the price of assets can cause a ‘panic’ as investors try to sell what they already own, to get as much for it as they can, as they know that the price will drop further in the future.