Japan's central bank has raised its main interest rate to a new 31-year high after a surge in global energy prices, while across the globe UK private sector wage growth has slowed to its lowest rate in five years, reinforcing the case for the Bank of England to leave rates on hold.
On Tuesday, the Bank of Japan (BOJ) increased its policy rate to 1% from 0.75% – a level not seen since 1995. The decision comes as some other central banks have raised rates this year as the US-Israel war with Iran pushed up the cost of living.
“Japan's central bank raised its key rate to 1% – a 31-year high – while UK wage growth hit a five-year low, strengthening the case for BOE to hold.”
Japan’s interest rates were cut aggressively in the 1990s to combat the fallout from a collapse in asset prices, and they had been near zero for two decades as prices fell and growth stagnated. The bank has been gradually raising its rate since March 2024, when it delivered the country’s first hike in 17 years.
"After twenty years of deflation, Japan is now in an inflationary upcycle," Japan economist Jesper Koll told the BBC. "Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy."
The BOJ faces a tricky trade-off: raising rates could help lower inflation but makes borrowing costlier, increasing expenses for the government and businesses. Governor Kazuo Ueda missed this week’s meeting due to being in hospital for treatment of an infected liver cyst, but has expressed an increasingly positive stance on raising rates in recent months.
The bank said the risk of Japan’s economy deteriorating sharply due to the Iran war was less likely because of government measures including easing the impact from high fuel costs. However, it noted that "medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target."
In the UK, private sector wage growth slowed to its lowest rate in five years, a slowdown that will reinforce the case for the Bank of England to leave rates on hold.