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

Oh wow, been waiting for this for awhile. Boj has had yield curve control for awhile to keep rates low, basically printing money and causing inflation in exchange for setting rates below market. It was going to happen as all other central banks have raised rates but Japan has remained the last holdout.

By raising rates they have admitted defeat, the markets are stronger than the polite Japanese fiction that things could go back to the way they were.

And also convexity. Raising rates from .25 to .5 is a lot more damaging than 7.25 to 7.5, even though it is the same amount percentage wise. Basically the cost of capital has doubled, but I think breaking the bank of Japan is the more important thing psychologically. It means that there are limits and we now have trade offs.