In brief
The Bank of Japan (BOJ) lifted its main policy rate to 1% from 0.75% – the steepest increase in over three decades – after a spike in global energy costs. The move follows a broader trend of tightening by other major central banks amid geopolitical tension. Despite the hike, Japan’s overall inflation remains below the BOJ’s 2% target, prompting a careful balancing act between price stability and economic growth. Analysts say the rate raise may help stabilize the yen, which has weakened against the dollar and euro.
Central bank hikes rate to 1%
Japan’s Bank of Japan raised its policy rate to 1% from 0.75%, the highest level since 1995, marking the first increase in a decade.
The decision was prompted by a surge in global energy prices that fed into domestic inflation, which rose by over 6% in wholesale prices in May – the fastest pace in three years.
"After twenty years of deflation, Japan is now in an inflationary upcycle," said economist Jesper Koll, noting the BOJ’s shift away from emergency monetary policy.
The bank’s governor Kazuo Ueda, who missed this week’s meeting due to hospitalisation, has signalled a positive stance on further rate hikes. He noted that if upside price risks outweigh downside economic risks, raising rates should be reconsidered.
Japanese Prime Minister Sanae Takaichi, who favours domestic spending, has not opposed the policy shift but faces growing pressure to curb inflation.
The hike follows an earlier 0.75% increase announced in December – the second since Takaichi’s election – and aims to stabilise the yen, which has been under pressure from the dollar and euro.
Even with the increase, Japan’s rates remain low compared with other major economies. The U.S. Federal Reserve and the Bank of England stand above 3%, while the Reserve Bank of Australia holds rates at 4.35% but may hike again if inflation persists.
"There has been a sense that the yen is too cheap and that raising its currency will not hurt," said UC San Diego finance professor Ulrike Schaede, drawing attention to a possible slow global realignment.
(Additional reporting by Osmond Chia)
For more context, read the December BOJ rate increase.
