Bank of Japan raises its rate to 1.25pc, a 31-year high: why it matters here

The Bank of Japan raised its policy rate by 0.25 percentage points to 1.25 per cent on Friday, the highest level in 31 years, since 1995. Core consumer inflation in Japan has been holding near the 2 per cent target and headline inflation is above it.

Governor Kazuo Ueda's bank called it another step away from decades of ultra low rates, and said policy is moving closer to what it considers neutral for the economy.

Why a rate in Tokyo matters in Karachi

For most of the last 25 years Japan was where the world borrowed for nearly nothing. Investors took yen at close to zero per cent, converted it, and bought higher yielding assets elsewhere: US bonds, emerging market debt, equities. That trade has a name, the yen carry trade, and it has been one of the quiet engines of global liquidity.

Every quarter point the Bank of Japan adds makes that borrowing more expensive and the unwinding more likely. When the carry trade unwinds, money comes out of riskier markets first, and frontier and emerging markets are at the front of that queue.

Pakistan does not borrow in yen in any size. The exposure is indirect and it runs through two channels.

The dollar and the rupee. Japanese institutions are among the largest foreign holders of US Treasuries. If domestic yields at home rise enough to bring that money back, US yields rise further. The US 10-year already went above 5 per cent on Friday for the first time since 2007. Higher US yields pull dollars out of emerging markets. The rupee slipped to Rs 277.42 overnight from Rs 277.28.

The cost of our next dollar borrowing. Pakistan's external funding, whether a eurobond, a commercial loan or a multilateral facility, is priced off global benchmarks. A world with a 5 per cent US 10-year and a tightening Bank of Japan is a world where our next dollar is dearer.

What it does not do

It does not change the SBP policy rate, which is at 11.5 per cent, or KIBOR, which was 12.33 per cent at the last 12-month reading. Your car loan and your home loan are priced off those, not off Tokyo. Check what a change would do to your instalment on the car loan calculator or the home loan calculator.

It also does not, by itself, move Japanese car prices here. Toyota, Honda and Suzuki price their Pakistani assembled vehicles off local costs and the rupee, not off the Bank of Japan.

The line to watch

Japan is the last large economy to leave near zero rates. It is now hiking while the Federal Reserve has also started raising again. Two of the three biggest sources of global liquidity tightening at once is the condition under which emerging market currencies have historically come under real pressure. Pakistan goes into it with SBP reserves at a record $21.39 billion, which is a better starting point than 2022 or 2008.

Today's rupee rate is on our dollar rate page.