What to know about the possible impact of Japan's rate hike

The Bank of Japan raised its key policy rate to a 30-year high on Friday in a widely anticipated move that could rattle world markets.

The two-day BOJ policy meeting wrapped up with the 0.25% hike in its benchmark short-term rate. That took the policy rate to 0.75%, its highest level since September 1995.

In a statement, the central bank said the decision was unanimous and that it expected to raise rates further if there are no major changes in the outlook for the economy.

The 0.75% rate is still low by most standards, but the BOJ has kept that rate near or below zero for years, trying to pull the economy out of a deflationary funk. Since the pandemic, most other central banks, like the U.S. Federal Reserve, have raised rates to counter spiking inflation and then begun cutting them to help their slowing economies recover momentum.

Japan's own economy contracted at a 2.3% annual rate in the last quarter, but improved business sentiment and price pressures have led the BOJ to relent and raise rates. Here are some things to know about its decision.

Japan's interest rates rise while other countries' fall

Since Japan's economic bubble burst in the early 1990s, the central bank has kept borrowing costs low to encourage more spending by businesses and consumers.

As Japan's population has aged and begun declining, its economy has slowed and that led to deflation, or falling prices due to weak demand. Even with cheap credit, investment has lagged, stunting economic growth.

In early 2013, the central bank launched what was dubbed a ''big bazooka'' of monetary easing, cutting interest rates and purchasing government bonds and other securities to help channel more money into the economy. When the COVID-19 pandemic struck, the benchmark interest rate was at minus 0.1%. The BOJ only began raising it in 2024, the first hike in 17 years, after inflation stabilized above its target of about 2%.

A weaker Japanese yen has pushed inflation higher

The Japanese yen has weakened against the U.S. dollar and many other major currencies. That has raised the cost, in yen terms, of imported food, fuel and other items needed to keep the world's fourth largest economy running.

The strong appetite for investing in dollar-denominated shares of companies linked to the artificial intelligence boom has also pulled money out of the yen and into dollars.

Higher interest rates are expected to raise the value of the yen against the dollar as investments flow into Japan seeking higher yen-denominated yields. Friday's move would signal the central bank's intention of continuing to ''normalize'' its monetary policy with further rate hikes next year.

''The BOJ's stance towards rate hikes reflects the fact that inflation is becoming entrenched," Kei Fujimoto, a senior economist at SuMi Trust, said in a commentary. ''If drivers such as a further depreciation of the yen accelerate inflation going forward, it is possible that the pace of rate hikes will also increase accordingly.''

The dollar is worth about 156 Japanese yen, nearly twice its level in 2012 and near its highest level this year.

World markets are bracing for impact

Even small changes in interest rates can have a big impact on markets. A rate hike in Japan would undermine an investment strategy known as the ''carry trade.'' That involves investors borrowing cheaply in yen and then using that money to invest in higher paying assets elsewhere.

A rate hike also is expected to crimp demand for other assets, including cryptocurrencies. Reports last week that the BOJ would go ahead and raise rates caused the price of bitcoin, for example, to drop below $86,000. The original cryptocurrency had bolted to record highs near $125,000 in early October.

Risks for Japan

Judging the timing and scale of changes to interest rates and other monetary policies are the biggest challenge for central banks, given the time it takes for such moves to ripple throughout the real economy and financial markets.

Like the Federal Reserve, Japan's central bank struggles to balance the need to boost business activity and create jobs with the imperative of containing inflation.

The BOJ held off on raising rates earlier given uncertainties over how U.S. President Donald Trump's tariffs might hit automakers and other exporters. A deal setting U.S. duties on imports from Japan at 15%, down from the earlier plan for a 25% rate, has helped ease those concerns.