The Bank of Japan (BoJ) has raised its main interest rate to 1% – the highest level since 1995 – as it battles inflationary pressures from the Iran war that have driven wholesale prices up by more than 6% in a year. Policymakers in Tokyo increased the short-term policy rate by a quarter of a percentage point from 0.75%, warning that companies were passing on rising oil costs to each other at a “relatively fast pace”.
The decision comes after Japan spent two decades with near-zero interest rates following the collapse of property and share prices in the 1990s. The BoJ began its current tightening cycle in March 2024, when it implemented the country’s first rate hike in 17 years. “After twenty years of deflation, Japan is now in an inflationary upcycle,” said Jesper Koll, an economist in Japan. “Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy.”
“Japan raises interest rate to 1%, highest since 1995, to curb Iran war-driven inflation.”
The central bank’s governor, Kazuo Ueda, missed this week’s meeting while being treated in hospital for an infected liver cyst. In his absence, deputy governor Shinichi Uchida told a press conference in Tokyo that the signing of a US-Iran peace memorandum was “a welcome move” but noted uncertainty about how quickly oil supplies would rise. “Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a risk that underlying inflation may deviate from our target,” Uchida said. “With underlying inflation approaching 2%, it’s important to ensure we achieve our target stably.”
Japan’s overall inflation rate stood at 1.4% in April, still below the BoJ’s 2% target, but wholesale prices climbed more than 6% in May from a year earlier – the fastest pace in three years. The BoJ faces a difficult trade-off: higher rates can cool inflation but also increase borrowing costs for the government and businesses. Susannah Streeter, chief investment strategist at Wealth Club, said the move “was widely expected, but it’s a step-change in monetary policy for Japan, given it pushes borrowing costs to levels not seen since 1995. There was some relief that the move wasn’t more hawkish, with even a 50-basis-point hike having been mooted.”
Tokyo’s stock market closed at a new record high, with the Nikkei index hitting 70,000 points for the first time during Tuesday’s session. Whether the BoJ can sustain its tightening without derailing Japan’s fragile recovery remains an open question.