Tokyo: Japan’s central bank has raised its benchmark interest rate to its highest level in 31 years, continuing its gradual shift away from decades of ultra-low borrowing costs as the economy faces mounting pressure from inflation, energy prices and a weakening yen.
The Bank of Japan (BOJ) increased its policy rate from 1 percent to 1.25 percent in a widely anticipated move, taking borrowing costs to a level last seen in 1995. The latest increase comes as major central banks respond to renewed inflationary pressures linked to higher energy prices following disruptions caused by the war in Iran.
The US Federal Reserve raised its benchmark rate, marking its first increase in more than three years, while the European Central Bank also raised borrowing costs earlier this month. The BOJ has been steadily tightening monetary policy since 2024, when its benchmark rate stood at minus 0.1 percent.
The latest decision marks its sixth rate increase over the past two and a half years as the central bank moves towards interest-rate levels more comparable with other major economies. Higher interest rates can make a country’s currency more attractive to investors by offering improved returns on assets denominated in that currency. However, Japan continues to face pressure on the yen despite its tightening cycle.
Japan is also dealing with a combination of rising prices, a shrinking workforce and prolonged weakness in its currency. Official figures released ahead of BOJ decision showed that core inflation eased slightly to 1.7 percent in August from 1.8 percent in July, remaining close to the central bank’s 2 percent target.
Although Japan’s inflation rate remains relatively moderate by international standards, sustained price increases represent a significant shift for an economy that experienced very low inflation or deflation for much of the past three decades.
Energy costs are adding to the pressure. Global oil and gas prices have risen this year with disruptions to shipments through the Strait of Hormuz linked to the Iran war. Japan is particularly exposed to such disruptions because of its heavy reliance on energy imports from the Middle East.
The yen has also remained under pressure in recent months. In August, Japan and the United States confirmed that they had jointly intervened in currency markets after the yen fell to a fresh 40-year low. It was the first coordinated intervention by the two countries since 2011. Japan’s Ministry of Finance and US Treasury Secretary Scott Bessent said at the time that further joint intervention could be considered if necessary.
Bessent has also urged BOJ Governor Kazuo Ueda to raise interest rates to support the yen, calling on him to ‘do the right thing’. Analysts have warned that continued weakness in the yen could add to imported inflation, potentially increasing pressure on the BOJ to tighten monetary policy more quickly than expected.
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