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

When a central bank raises interest rates, it raises the rate at which banks have to loan each other money. Although the rate is still super low, increasing rates makes lending and borrowing slow down. The reason it is a big deal for Japan to do it, is because they have a gigantic debt to GDP, and have had rates at or below .5, or even negative, since the mid 90s I believe. This coupled with their recent extreme currency volatility, people are probably wondering if we are seeing major sovereign nations financial systems starting to fall apart, after decades of QE and kicking the can down the road. Many believe we are on the cusp of a gigantic shit-storm, where the current monetary system is going to fail.