Bank of Japan lifts rates to highest level since 1995 as inflation pressures mount

Japan’s central bank has raised its main interest rate to a fresh 31-year high as it continues to move away from decades of ultra-low borrowing costs amid rising economic pressures.

In a widely expected move on Friday, the Bank of Japan increased the rate from 1 percent to 1.25 percent, a level not seen since 1995.

The decision comes as major central banks around the world are raising rates, with higher energy prices driven by the Iran war helping to push up inflation. On Wednesday, the US Federal Reserve raised its benchmark interest rate for the first time in over three years, while the European Central Bank also increased borrowing costs earlier this month.

The Bank of Japan has been raising rates since 2024 when the rate stood at minus 0.1 percent. It has now hiked rates six times in the last two and a half years as it tries to bring its rate closer to levels in other major economies.

When a central bank raises rates, a move known as tightening monetary policy, the country’s currency usually strengthens as it becomes more attractive to traders.

“One of the world’s last sources of ultra-cheap money is disappearing,” said market analyst Lale Akoner from investment company eToro.

Japan is facing several economic challenges, including a persistently weak yen, rising prices and a shrinking workforce.

Official figures released on Friday before the bank’s announcement showed inflation eased slightly last month. Core inflation fell to 1.7 percent in August from 1.8 percent the previous month but remains close to the bank’s 2 percent target.

While Japan’s inflation rate is not high by international standards, rising prices are a relatively new development for the economy, which had experienced very low inflation or deflation for about three decades until recently.

Global oil and gas prices have risen this year as the Iran war disrupted shipments through the key Strait of Hormuz shipping route. Japan is particularly vulnerable to such disruptions because it relies heavily on energy from the Middle East.

The country’s currency has also been under pressure in recent months. In August, Tokyo and Washington confirmed they had jointly intervened to halt a slide in the yen after it fell to a fresh 40-year low. It was the first coordinated intervention since 2011 when both countries acted together to weaken the yen after the devastating earthquake and tsunami that hit eastern Japan.

Both Japan’s Ministry of Finance and US Treasury Secretary Scott Bessent said at the time that they would not hesitate to conduct more joint interventions in future. Bessent has also been increasing pressure on the Bank of Japan to raise interest rates to help support the yen, urging Governor Kazuo Ueda to do the right thing.

“If [the yen] remains weak despite higher rates, the resulting inflation pressure could force the BOJ to tighten faster than markets or Japan’s government would like,” Akoner said.