The Bank of Japan (BOJ) announced on Tuesday that it would lift its policy rate by 25 basis points, raising the main interest rate to 1% from 0.75%. This move takes the rate to its highest level since 1995, marking the second increase since Prime Minister Sanae Takaichi assumed office.
The decision comes amid a surge in global energy prices that has weighed on Japan’s prices and recommended the on‑hand inflation of 1.4% in April, below the BOJ’s 2% target. Wholesale prices rose more than 6% in May, the fastest pace seen in three years. The BOJ noted that higher energy costs and rising inflation expectations pose a risk that underlying inflation could diverge from the target.
Japan’s economy, which suffered a prolonged period of deflation and was governed by ultra‑low rates since 1994, has been proceeding on a gradual path to normalisation. Economists such as Jesper Koll have described the current environment as “the beginning of an inflationary up‑cycle.”
While the BOJ aims to curb inflation, the higher rate also makes borrowing more expensive for the government and businesses. Governor Kazuo Ueda, who is recovering from an infected liver cyst, missed the meeting but expressed a positive outlook on raising rates if inflation outweighs the risks to growth.
The rate hike also reflects a broader strategy to stabilise the yen, which has been under pressure from the stronger U.S. dollar and euro. Speaking on the move, UCSD business professor Ulrike Schaede said that a sharper yen is not necessarily detrimental to the economy.
In contrast, the U.S. Federal Reserve and the Bank of England maintain rates above 3%, while the Reserve Bank of Australia held rates at 4.35% with the possibility of further hikes.
Prime Minister Takaichi has not publicly criticised the BOJ’s policy changes, although her administration is under pressure to bring down inflation. The recent rise is the second since she took office, following a December increase to 0.75%.
The BOJ’s move illustrates a global realignment as central banks weigh the twin goals of containing inflation and supporting economic activity in a turbulent geopolitical climate.
