Factors Influencing Bank of Japan Policy Interest Rate Fluctuations
Overview of Exploratory Data Analysis on Factors Influencing Bank of Japan Policy Interest Rate Fluctuations
This analysis aims to identify the primary factors behind the core question of what drives the Bank of Japan’s policy interest rate.
As an analytical framework, we compare interest rates, prices, exchange rates, and long-term interest rates in both Japan and the United States, examining trends before and after the lifting of negative interest rates. Specifically, we conduct an exploratory data analysis (EDA) using 11 types of monthly indicators to interpret the factors influencing policy decisions from multiple perspectives.
The analysis period covers from January 2022 to September 2026, using data sources from FRED, the Statistics Bureau of Japan, and Bank of Japan monetary policy decision information. By analyzing these indicators over time, we attempt to elucidate the structural mechanisms that influence interest rate trends.
Composition of the Analysis: 3 Groups and 11 Monthly Indicators
In this analysis, we cover the 57-month period from January 2022 to September 2026, conducting a structural analysis using 11 monthly indicators across three main areas: Japan, Exchange Rates, and the United States. The data used is based on statistics from FRED, the Statistics Bureau of Japan, and the Bank of Japan.
First, as domestic Japanese indicators, we cover the Bank of Japan’s policy interest rate, the uncollateralized overnight call rate, and the 10-year government bond yield to capture trends in monetary policy and the bond market. Additionally, to understand inflation and labor market trends, we include CPI (headline, core, and core-core) and the unemployment rate in the analysis.
Next, in the analysis of the foreign exchange market, we use the dollar-yen rate (monthly average) as a base and verify derived indicators derived from interest rate differentials, such as the Japan-US policy interest rate differential, 10-year interest rate differential, real policy interest rate, and the yield curve.
Finally, as key indicators of the US economy, we analyze the effective federal funds rate, 10-year government bond yield, and CPI (year-on-year) to compare and examine economic trends between Japan and the United States.
The Trajectory of Financial Normalization Indicated by 4 Key Indicators
The progress of financial normalization can be specifically interpreted from four key figures. First, the Bank of Japan’s policy interest rate rose from -0.1% in March 2024 to 1.25% by September 2026. A total of six rate hikes have been implemented over these 30 months, and with the most recent hike, the interest rate level has reached its highest point in 31 years.
Such domestic interest rate increases have also brought about significant changes in external interest rate differentials. The gap between the federal funds rate and the Bank of Japan’s rate has narrowed from a peak of 5.4 percentage points to 2.5 percentage points in September 2026. This narrowing of the interest rate differential has spilled over into the foreign exchange market, with the monthly average dollar-yen rate recording a peak of 162 yen in July 2026. These indicators clearly show that Japan’s financial environment is in a period of structural transition.