Why the government of Japan increase their interest rate?

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The Japanese government, through the Bank of Japan (BOJ), raised interest rates in August 2024 in response to growing inflationary pressures. Japan had experienced years of low inflation, even deflation, but by mid-2024, inflation had accelerated beyond expectations, driven by higher energy costs, a weakening yen, and global supply chain disruptions. These inflationary trends threatened the BOJ's long-term price stability target.

Additionally, the BOJ had been under pressure to normalize its ultra-loose monetary policy, which had been in place for decades to combat deflation. Rising global interest rates, particularly in the U.S. and Europe, added further pressure on Japan to adjust its rates to avoid excessive yen weakening and capital outflows.

The rate hike was aimed at controlling inflation and stabilizing the yen. However, the unexpected nature of the decision shocked markets, leading to the unwinding of yen carry trades and a sharp market sell-off in Japan​

The term currency weakening, what does it mean? 

In the context of August 2024, when the "weakening yen" is mentioned, it refers to the *depreciation* of the yen against other major currencies. This means that the value of the yen had been falling, making it weaker compared to currencies like the U.S. dollar or the euro.

The depreciation of the yen had been a concern for the Japanese economy because it makes imports more expensive, fueling inflation. At the same time, a weaker yen can benefit exporters because Japanese goods become cheaper abroad. However, the rapid depreciation was contributing to inflationary pressures, which prompted the Bank of Japan to raise interest rates to support the currency and contain inflation. After the interest rate hike, the yen appreciated as demand for the currency increased, reversing some of its earlier depreciation【6†source】【7†source】.

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