Japan’s central bank, the Bank of Japan (BOJ), lifted its main policy rate to 1% on Tuesday, the highest level since 1995 and a 31‑year increase. The jump follows a surge in global energy prices and a shift away from the long‑term policy paralysis that characterised Japanese monetary policy for two decades.
Prior to the change, the BOJ had been creeping its policy rate from 0.75% in December to 0.75% this month. The December hike was, in fact, the first increase in 17 years, ending a period of near‑zero rates that had followed the asset‑price bubble burst of the 1990s.
Higher wholesale prices—up more than 6% year‑over‑year in May—has injected fresh inflationary pressure into Japan’s economy. Yet consumer inflation, at 1.4% in April, is still below the BOJ’s 2% target.
The BOJ’s decision came amid a broader tightening wave by other major central banks, spurred in part by the Israel‑Iran tensions that have pushed up global commodity prices. Even the Reserve Bank of Australia surveyed the decision, keeping its rate at 4.35% but indicating a willingness to raise further.
Japan’s long‑standing battle with deflation is turning into an inflationary up‑cycle, central banker Jesper Koll told the BBC. He said the BOJ no longer needs “emergency” monetary policy and is returning to a “normal” framework.
CEO Kazuo Ueda, however, missed the meeting to discuss rates due to a medical condition but has signalled a positive stance towards further hikes. He noted that “upside risks to prices outweigh downside risks to economic activity” could justify a policy rate rise.
Prime Minister Sanae Takaichi, who has championed spending growth, had previously dismissed rate increases but has not publicly critiqued the BOJ’s move. This hike marks the second policy rate rise since she assumed office last year.
The currency angle also influences the decision. The yen has been under pressure from the US dollar and the euro, prompting the BOJ to take action to stabilise it. According to UC San Diego professor Ulrike Schaede, “the yen is too cheap; raising its currency will not hurt.”
Despite the hike, Japan’s rates remain lower than the 3%‑plus rates charged by the US Federal Reserve and the Bank of England. The BOJ’s move underscores a “slow global realignment” in monetary policy, Schaede said.
The longer‑term risk remains if inflation expectations rise excessively; the BOJ warns that underlying inflation could deviate above the target if expectations grow.
