What happened
The Bank of Japan (BoJ) raised its policy rate by 0.25 percentage points to 1.25% on Friday, the first increase since June and the highest level in 31 years. Core consumer inflation held steady near the 2% target in August, with companies continuing to pass on higher costs for food and groceries.
The decision came with dissents on the board. Strategists cited by Bloomberg said the split vote sent a bearish signal on the yen, which extended declines against the dollar after the announcement. Attention turned to Governor Kazuo Ueda's post-meeting briefing for guidance on the pace of further tightening.
China's yuan hit its strongest level since 2022 after a supportive fixing by the People's Bank of China, ahead of a planned meeting between Presidents Trump and Xi. Copper was set for a weekly gain as Chinese buyers returned, while oil fell about 1% on hopes of limited supply disruptions.
In Malaysia, analysts warned that low-cost carrier AirAsia may be forced to scale back operations after a sharp rise in jet fuel costs contributed to heavy group losses. The government had sounded out Malaysia Airlines and Batik Air on taking over domestic routes should AirAsia's position worsen.
The context
The BoJ's move takes borrowing costs closer to what the bank deems a neutral level, marking another step away from decades of ultra-low rates that made the yen a favoured global funding currency. The Federal Reserve's rate rise on Wednesday, and the prospect of another later this year, added pressure on the BoJ to keep pace. Japan's rate still sits below the European Central Bank (ECB), which lifted its key rate to 2.5% last week.
Reuters reported that US Treasury Secretary Scott Bessent had pressed Japan over its spending and monetary stance, a factor in the pace of the tightening cycle. The BoJ has cited a shrinking labour pool lifting wages as a structural, rather than temporary, driver of inflation.
For Malaysia, the concern is that rival carriers lack the commercial incentive to absorb unprofitable domestic routes, leaving the government to choose between shrinking connectivity or subsidising essential links.
Why it matters
A wider US-Japan rate gap risks weakening the yen further and lifting Japanese inflation through higher import costs, a self-reinforcing dynamic the BoJ is trying to manage. A weaker yen also affects carry-trade positioning across global markets.
The yuan's strength and the PBOC's signalling suggest Beijing is managing its currency ahead of trade diplomacy with Washington, with implications for commodity flows and emerging-market sentiment.
AirAsia's difficulties illustrate how fuel-cost shocks can force governments in the region into fiscal support for aviation, with knock-on effects for regional connectivity and public finances.
What to watch
Governor Ueda's guidance on the timing of the next BoJ hike, and whether the yen stabilises or extends its slide against the dollar.
The outcome of any Trump-Xi meeting and further PBOC signalling on the yuan.
AirAsia's search for fresh financing and whether the Malaysian government opts for subsidies or allows domestic routes to shrink.