Japan raises interest rates to 31-year high

Japan’s central bank has raised its key interest rate to 1%, marking the highest level since 1995 as the country responds to rising inflation pressures

TOKYO: Japan’s central bank has raised its key interest rate to 1%, marking the highest level since 1995 as the country responds to rising inflation pressures linked to global energy costs.

The Bank of Japan announced the decision on Tuesday, increasing the policy rate from 0.75%. It is the latest step in a gradual tightening cycle that began in 2024 after years of ultra-low interest rates.

Officials said the move reflects growing concerns over inflation driven by higher energy prices and global economic uncertainty. Japan has been particularly affected due to its dependence on imported oil and gas.

The central bank had kept rates near zero for decades following the economic downturn of the 1990s, when asset prices collapsed and growth stagnated. The recent hikes mark a significant shift in long-standing monetary policy.

Economists say Japan is now entering a new phase of moderate inflation after years of deflation. They believe the central bank is moving towards normalising monetary policy after decades of emergency measures.

Wholesale prices in Japan rose more than 6% in May compared to the previous year, reaching the fastest growth rate in three years. However, overall inflation remains around 1.4%, slightly below the central bank’s 2% target.

The Bank of Japan said risks to economic stability remain, but rising inflation expectations have increased pressure to adjust rates further. Officials warned that inflation could move above the target if trends continue.

The rate hike also aims to support the Japanese yen, which has weakened against major global currencies including the US dollar and euro. Analysts say a stronger yen could help stabilise import costs.

Despite the increase, Japan’s interest rates remain low compared to other major economies such as the United States, United Kingdom and Australia, where rates are significantly higher.

Experts describe the move as part of a broader global shift in monetary policy as central banks try to balance inflation control with economic growth concerns.

The Bank of Japan is expected to continue monitoring inflation and global developments before making further decisions on interest rates in upcoming meetings.