It is a very symbolic event that the Bank of Japan raised the short-term policy interest rate by 0.25 percentage points from 0.75% to 1% through this financial policy decision meeting. This figure, reached 31 years after 1995, signals the end of the ultra-loose monetary policy that Japan has maintained. In particular, the fact that this decision was made with the overwhelming approval of policy committee members (7 in favor, 1 against) even in the absence of Governor Kazuo Ueda due to health reasons proves that the Japanese monetary authority's will to tighten is firm. They judged that blocking the rising price pressure that had already deeply penetrated us was more urgent for the sustainability of the economy than the possibility of an economic contraction caused by political chaos in the Middle East.

The key background behind this interest rate increase is the all-round price pass-through phenomenon, led by the rise in oil prices. The Bank of Japan diagnosed that the price increase that began in business-to-business transactions is now spreading to consumer prices in general, threatening the economic constitution. In a situation where the employment and income environment is improving and corporate profits remain solid, there is a fear that inflation may accelerate if interest rates are frozen. In fact, the Bank of Japan has made clear its position that it will continue to gradually raise interest rates and reduce financial easing depending on future economic conditions, making it clear that it will continue the large trend of austerity rather than temporary measures.

Along with changes in monetary policy, something to keep an eye on is bond market stabilization measures. The Bank of Japan has decided to completely stop reducing long-term government bond purchases from April next year, which is the final piece of the puzzle of the two-dimensional easing policy that has been in place since 2013. The intention is to break away from the practice of suppressing market functions by purchasing large amounts of government bonds and to establish a normal financial environment in which interest rates are determined by market principles. However, the strategy to induce a soft landing by gently adjusting the size of purchases until the first quarter of next year to prevent sudden shocks to the market clearly shows how carefully the Japanese financial authorities designed this tightening.

Japan's move is making investors around the world nervous, stimulating the possibility of liquidation of the 'yen carry trade' in the global financial market. If large amounts of capital, which borrowed money at low interest rates in Japan and invested in overseas high-yield assets, return to their home countries, volatility in the stock and bond markets is expected to inevitably increase. In particular, the Korean economy is faced with the double-edged sword of improving export competitiveness due to the strong yen and slowing export demand to Japan. In addition, the Bank of Korea is also in a situation where a sophisticated response is required to prepare for the resurgence of global austerity measures, with the difficulty of interest rate policy increasing amid the complex pressures of prices, exchange rates, and import price burden.