Japan’s central bank has raised its benchmark interest rate to 1 percent, the highest level in 31 years, as rising global energy costs continue to fuel inflation. The Bank of Japan announced the increase Tuesday, lifting the rate from 0.75 percent, a level not seen since 1995.
The move follows a series of gradual hikes that began in March 2024, when the BOJ raised rates for the first time in 17 years. For decades, Japan kept borrowing costs near zero to combat deflation and sluggish growth after the collapse of asset prices in the 1990s.
“After twenty years of deflation, Japan is now in an inflationary upcycle,” economist Jesper Koll said. “Emergency monetary policy is no longer needed and the BOJ wants to get back to normal.”
The bank has faced mounting pressure to rein in inflation, which surged as energy prices spiked amid the ongoing US-Israel conflict with Iran. Wholesale prices jumped more than 6 percent in May, the fastest pace in three years, though consumer inflation remains at 1.4 percent, below the BOJ’s 2 percent target.
Governor Kazuo Ueda, who missed this week’s meeting due to illness, has previously signaled support for higher rates, saying risks of rising prices may outweigh concerns about slowing growth. Prime Minister Sanae Takaichi, who has favored boosting spending, has not publicly criticized the BOJ’s tightening despite earlier skepticism about rate hikes.
The decision also aims to stabilize the yen, which has weakened against the dollar and euro. “There has been a sense that the yen is too cheap and that raising its currency will not hurt,” said Ulrike Schaede, a professor at the University of California San Diego.
Reactions have been mixed. Business leaders worry higher borrowing costs could squeeze companies already struggling with energy bills. “This will make financing more expensive for us,” said a Tokyo manufacturer. But some analysts welcomed the move as overdue. “Japan cannot remain stuck in crisis-era policy forever,” said a financial strategist in Osaka.
On social media, many users voiced frustration over the impact on households. “We are already paying more for fuel and food, now loans will cost more too,” one user wrote. Others praised the BOJ for acting decisively. “Finally, Japan is joining the rest of the world in normalizing rates,” another posted.
Even with the hike, Japan’s rate remains low compared to other major economies. The U.S. and U.K. are above 3 percent, while Australia held at 4.35 percent this week but warned of further increases if inflation persists. Analysts say Japan’s move could mark the beginning of a slow global realignment in monetary policy.
