The Bank of Japan has increased its main interest rate to 1%, marking the highest level since 1995, amid rising global energy prices and inflationary pressures.
Japan's central bank has raised its main interest rate, reaching a 31-year high, in response to a significant increase in global energy prices.
On Tuesday, the Bank of Japan (BOJ) lifted its policy rate from 0.75% to 1%, a level that has not been seen since 1995.
This decision comes as several other central banks have also increased interest rates this year, partially due to the impact of the US-Israel conflict with Iran, which has driven up living costs globally.
Historically, Japan's interest rates were aggressively cut in the 1990s to mitigate the repercussions of a collapse in asset prices, including real estate and stocks. For two decades, rates remained near zero as Japan faced falling prices and stagnant growth.
The BOJ has gradually increased its interest rate since March 2024, marking the first hike in 17 years at that time.
Japan economist Jesper Koll commented to the BBC, "After twenty years of deflation, Japan is now in an inflationary upcycle. Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy."
The BOJ has faced mounting pressure to address rising inflation, which had remained extremely low in Japan until recently.
Higher energy prices have contributed to inflationary pressures, particularly affecting countries like Japan that are heavily reliant on oil and gas imports from the Middle East.
In May, Japan's wholesale prices surged by over 6% compared to the previous year, marking the fastest increase in three years.
Despite this, the overall inflation rate in Japan was recorded at 1.4% in April, which remains below the BOJ's target of 2%.
The BOJ noted that while the risk of a sharp economic downturn due to the Iran war has decreased thanks to government measures aimed at alleviating the impact of high fuel costs on households, there are concerns about medium- and long-term inflation expectations potentially exceeding the price target.
The BOJ faces a challenging situation: while raising interest rates may help to curb inflation, it also makes borrowing more expensive, which could raise costs for both the government and businesses.
Kazuo Ueda, the BOJ's governor and a key decision-maker regarding interest rates, missed this week's meeting due to hospitalization for treatment of an infected liver cyst. However, he, along with other BOJ officials, has shown a more favorable outlook on increasing rates in recent months.
Earlier this month, Ueda stated, "Even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate."
Prime Minister Sanae Takaichi, who is known for advocating increased government spending, has previously ruled out the possibility of raising interest rates, although she is now under pressure to reduce inflation in Japan.
Since taking office last year, Takaichi has not publicly criticized the BOJ's recent moves to increase interest rates.
This latest rate hike is the second since Takaichi assumed office and had been anticipated following the BOJ's previous adjustment to a policy rate of around 0.75% in December.
The decision to raise rates also aligns with the bank's goal of stabilizing the yen, which has faced pressure from major currencies such as the US dollar and the euro.
Ulrike Schaede, a business professor at the University of California San Diego, remarked, "There has been a sense that the yen is too cheap and that raising its currency will not hurt."
Despite the recent increase, Japan's interest rate remains comparatively low when viewed against other major economies. For instance, the US and UK have interest rates exceeding 3%, although both central banks are expected to maintain their current rates during upcoming meetings.
On the same day, the Reserve Bank of Australia decided to keep its rates at 4.35% but indicated that further hikes could be considered if inflation remains a concern.
Schaede suggested that the current situation might signal a "slow global realignment."
