A wave of austerity is coming: Japan's interest rate hike for the first time in 31 years and a major transformation of the global economy > News

The Bank of Japan's interest rate hike is more than a simple policy change; it is a symbolic event that signals the end of a long-lasting era of ultra-low interest rates. Japan has maintained a low interest rate of 0.75% to stimulate the economy, but the recent rise in import prices and the weakening yen have reached a critical point where it is no longer possible to maintain this rate. In particular, the fact that the interest rate increase is accepted as a fait accompli even in the unusual situation of Governor Kazuo Ueda's absence is evidence of the strong upward pressure on prices within Japan. The 1% figure is the first level reached since 1995, suggesting that the Japanese economy has fully entered a phase of structural inflation. This measure is based on a sophisticated calculation to not only raise short-term interest rates, but also manage volatility in the bond market through parallel policies such as reducing government bond purchases.

Behind the global austerity domino lies the persistent inflationary remnants of the Middle East war. Although international oil prices are calming down to the $80 range due to the ceasefire agreement between the United States and Iran, it is expected that it will take at least several months for the energy supply chain to be fully restored to its pre-war state. With uncertainty still lingering over the Strait of Hormuz, central banks around the world are making every effort to prevent supply shocks from being transmitted to consumer prices. The European Central Bank (ECB) has already taken the lead in price defense by raising interest rates to 2.25% for the first time in three years, and the U.S. Federal Reserve is also giving up expectations of an interest rate cut and strengthening its hawkish stance. This shows the harsh reality that the end of war does not immediately mean price stability.

The Korean economy is also by no means free from this wave of global austerity. Bank of Korea Governor Shin Hyun-song has recently placed price stability as a top priority, and has repeatedly emphasized the need to raise interest rates 'not too late'. Unlike his cautious actions in the past, Governor Shin is adjusting market expectations by sending a bold austerity message based on his expertise as a former member of the Bank for International Settlements (BIS). In particular, the Bank of Korea is not simply preoccupied with determining interest rates, but is strengthening its role as a central bank by promoting innovation in the overall payment ecosystem, such as improving the offshore payment system and researching digital currency (CBDC). From the perspective of the Korean economy, which is suffering from the double whammy of high exchange rates and price pressures, this preemptive response is interpreted as an inevitable choice to prevent capital outflow and strengthen the basic strength of the economy.

The biggest fear in the market centers on the possible liquidation of the ‘yen carry trade’. If interest rates in Japan rise, there is a high possibility that funds that had previously borrowed yen at low interest rates and invested in risky assets around the world will rapidly return to Japan. There are warnings that this outflow of funds could have a significant impact on virtual assets, including Bitcoin, and the U.S. stock market, which could reproduce a pattern similar to the past plunge in July 2024. Investors should keep a close eye on the possibility of further tightening by the Bank of Japan and the resulting surge in the value of the yen. If the yen strengthens, Japan's role as a global liquidity provider will shrink, forcing a re-evaluation of all risk assets.