Japan raises interest rate to 31-year high amid inflation pressures

TOKYO: The Bank of Japan (BOJ) has raised its benchmark interest rate to its highest level in 31 years as it continues to move away from decades of ultra-low borrowing costs and seeks to contain inflationary pressures.

In a widely anticipated decision on Friday, the central bank increased its policy rate from 1% to 1.25%. The new rate is the highest recorded in Japan since 1995.

The rate hike comes as higher energy costs linked to the conflict involving Iran have added to inflationary pressures around the world. Several major central banks have also tightened monetary policy in recent weeks.

The US Federal Reserve raised its benchmark rate on Wednesday for the first time in more than three years, while the European Central Bank increased borrowing costs earlier this month.

The BOJ began its gradual shift away from negative interest rates in 2024, when its policy rate stood at minus 0.1%. The latest decision marks its sixth increase over the past two and a half years.

The central bank has been steadily raising borrowing costs as it seeks to establish a more conventional interest-rate environment after years of exceptionally loose monetary policy.

Japan is currently dealing with several economic challenges, including a weak yen, rising consumer prices and a declining workforce. Official data released on Friday showed that core inflation eased slightly in August.

Core inflation fell to 1.7% in August from 1.8% in July. The figure remains relatively close to the BOJ’s 2% inflation target.

Although Japan’s inflation rate remains modest compared with many other economies, sustained price increases represent a significant change for a country that experienced very low inflation or periods of deflation for decades.

Energy costs have emerged as another concern. Global oil and gas prices have increased this year amid disruptions to shipments through the strategically important Strait of Hormuz.

Japan is particularly exposed to fluctuations in Middle Eastern energy supplies because of its heavy reliance on imported fuel from the region.

The yen has also remained under pressure. In August, Japanese and US authorities confirmed coordinated intervention in the currency market after the yen fell to a new 40-year low.

The joint intervention was the first of its kind between Tokyo and Washington since 2011, when both countries acted together following the devastating earthquake and tsunami in Japan.

Japan’s Ministry of Finance and US Treasury Secretary Scott Bessent said they remained prepared to intervene again if necessary.