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Fortunes have reversed in the Japanese stock market. And we all could be in for a rough ride.

The culprit? The Bank of Japan (BOJ). BOJ raised interest rates for Japan to 0.25%, marking the second time only in two decades that it has done so.

And boy, did the markets freak out.

The TOPIX and Nikkei 225 markets declined by 6.3% and 5.2% respectively last week, marking the steepest drop ever since the 2011 Tsunami.

Here is the main reason why the BOJ has done this.

Worried about cost of living and price pressures

Firstly, it’s worried about the yen. More specifically, Japanese consumers are having difficulty buying imported products with the weak yen.

The BOJ cites this, “The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention”.

The economic impacts of BOJ raising interest rates

If you are an investor in Japan, here are the economic impacts you definitely need to look out for.

Higher interest rates are expected to reduce the pace of economic activities in Japan.

What market movements you should look out for

Higher interest rates affect the entire market. To start with, you should monitor the impact on TOPIX and Nikkei 225. Both markets declined by more than 5% when BOJ announced that it was raising interest rates on 31 July 2024.

As the BOJ communicated that it will ‘continue to raise interest rates’, the next monetary policy meeting will be on 31 October 2024.

Conclusion

Here’s the TLDR. Japan is worried about import prices increasing for Japanese consumers, while consumer prices could go up even higher. So, it raised interest rates to try to strengthen the yen so that Japanese consumers could breathe better.

Higher interest rates will reduce consumer spending and business investment, and will have an impact on the broader TOPIX and Nikkei 225 markets.