The Bank of Japan (BOJ) has increased its key interest rate to 1.25%, marking a new 31-year high as it persists in its strategy to exit decades of near-zero borrowing costs. The decision, announced on Friday, was widely anticipated by markets.
This move lifts the benchmark rate to its highest level since 1995, continuing a tightening cycle that began in 2024 when rates stood at minus 0.1%. In the past two and a half years, the central bank has raised borrowing costs six times, aiming to align its monetary stance with other major economies.
The adjustment comes against a backdrop of rising global inflation driven by higher energy prices following the Iran war. Major central banks are similarly hiking rates; the US Federal Reserve recently raised its benchmark for the first time in over three years, and the European Central Bank increased its costs earlier this month.
Japan faces distinct economic headwinds, including a persistently weak yen, rising consumer prices, and a declining workforce. Official data released ahead of the BOJ decision showed core inflation easing slightly to 1.7% in August from 1.8% in July, though it remains close to the bank’s 2% target. While this inflation rate is modest by international standards, it represents a significant shift for an economy that endured deflation or very low inflation for roughly three decades.
Vulnerability to global supply shocks remains acute due to Japan’s heavy reliance on Middle Eastern energy. Global oil and gas prices have surged this year after the Iran war disrupted shipments through the Strait of Hormuz.
The yen has also come under severe pressure, recently hitting a 40-year low. In August, Tokyo and Washington conducted their first joint currency intervention since 2011 to halt the yen’s decline. US Treasury Secretary Scott Bessent has intensified pressure on the BOJ, urging Governor Kazuo Ueda to raise rates to support the currency, stating that both nations would not hesitate to intervene again if necessary.
Historically, rate hikes strengthen a country’s currency by making it more attractive to traders, but the BOJ is balancing this benefit against domestic economic growth concerns.
With the US Fed also hiking, Japan was practically forced to follow. Global coordination is real, however messy.
1.25% sounds high, but wages are still lagging. Will regular people actually feel relief or just more stress?
Finally! The yen was collapsing. This is the push we needed, even if it hurts borrowers.