Japan’s central bank has begun its final policy meeting of the year, and stock market are closely watching its next move. Investors expect the Bank of Japan (BOJ) to raise interest rates to their highest level in nearly 30 years. If confirmed, this would mark another step in Japan’s slow shift away from ultra-low interest rates.
The policy decision will be announced on Friday. According to data from LSEG, there is an 86% chance that the BOJ will raise its benchmark interest rate to 0.75%, a level last seen in 1995.
Why Japan is considering a rate hike
The main reason behind the expected rate increase is persistent inflation. Prices in Japan have stayed above the central bank’s 2% target for 43 consecutive months. By raising interest rates, the BOJ hopes to cool inflation and normalize its long-standing easy-money policies.
However, the timing is tricky. Japan’s economy remains weak. Revised GDP data shows that the economy shrank more than earlier estimates in the July–September quarter. Output fell 0.6% compared to the previous quarter and dropped 2.3% on an annual basis. Higher borrowing costs could further slow growth.
Impact on yen and global markets
A rate hike would likely strengthen the Japanese yen against the US dollar. A stronger yen can help reduce import-driven inflation in Japan. At the same time, global markets, including India, may feel the ripple effects as investors adjust their portfolios.
What this means for Indian markets
Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) play a major role in Indian markets. When global interest rates rise, investors often move money back to safer or higher-yielding markets.
A tighter policy in Japan could lead to:
- Reduced FII inflows into Indian equities
- Higher volatility in large-cap stocks with global exposure
- Short-term pressure on benchmark indices like the Nifty 50 and Sensex
In the past, similar global policy shifts have triggered brief market corrections in India.
Impact on the Indian rupee
Currency markets respond quickly to global rate changes. If the yen strengthens and the US dollar also remains firm, the Indian rupee could come under pressure.
A weaker rupee can:
- Increase costs for import-heavy sectors like oil and aviation
- Add to inflation concerns
- Influence the Reserve Bank of India’s future policy decisions
The RBI closely tracks such global developments while setting its monetary stance.
Sector-wise impact on Indian stocks
Indian banks have limited direct exposure to Japan. However, global risk aversion can hurt investor sentiment, leading to short-term pressure on banking and financial stocks.
IT and export-oriented companies
A weaker rupee can be positive for IT services and exporters. Since these companies earn revenues in foreign currencies, their rupee earnings and profit margins may improve.
Metals and commodities
Japan is a major consumer of commodities. Any slowdown in its economy could affect global commodity prices, which in turn may impact Indian metal and infrastructure stocks.