BOJ Hikes Rates to 1.25%, Impacting Global Capital Flows

The Bank of Japan (BOJ) has raised its benchmark interest rate by 25 basis points to 1.25%, marking its highest level in 31 years.

This decision, taken by a 7-2 vote, was widely expected by financial markets and marks another step away from Japan's decades-long ultra-loose monetary policy.

The BOJ's move comes as Japan grapples with inflation pressures linked to higher energy and import costs, while the yen remains under pressure. The US dollar was trading around 155 yen.

The biggest potential impact on India could come through global capital flows. For years, the yen's very low interest rates made it an important funding currency for the yen carry trade.

Investors could borrow cheaply in yen and invest in higher-yielding assets in countries such as India. As Japanese interest rates rise, the cost of maintaining such trades increases.