TOKYO: The Bank of Japan (BOJ) has raised its benchmark interest rate from 1% to 1.25%, reaching its highest level in 31 years as the central bank continues moving away from decades of ultra-low borrowing costs.
The widely expected rate increase, announced on Friday, brings Japan’s interest rate to a level not seen since 1995. The decision comes as the country faces economic challenges, including rising prices, a weak yen and a shrinking workforce.
The Bank of Japan interest rate increase also comes amid global inflationary pressures linked to higher energy prices and disruptions to oil and gas shipments caused by the Iran war.
Global Central Banks Raise Interest Rates
Major central banks have also been increasing borrowing costs as they respond to inflationary pressures.
The US Federal Reserve raised its benchmark interest rate on Wednesday for the first time in more than three years, while the European Central Bank increased borrowing costs earlier this month.
The Bank of Japan began raising interest rates in 2024, when its benchmark rate stood at minus 0.1%. The latest decision marks the sixth rate hike over the past two and a half years as the central bank gradually seeks to bring its policy closer to levels seen in other major economies.
Higher interest rates can make a country’s currency more attractive to investors by increasing potential returns on assets denominated in that currency. However, the impact on exchange rates depends on broader economic conditions and market expectations.
Japan continues to face several economic pressures, including a persistently weak yen, rising consumer prices and a declining workforce.
Official figures released on Friday before the BOJ announcement showed that core inflation eased slightly in August. The rate fell to 1.7% from 1.8% in the previous month, bringing inflation closer to the central bank’s 2% target.
Although Japan’s inflation rate remains relatively moderate by international standards, rising prices represent a significant change for an economy that experienced very low inflation or deflation for much of the past three decades.
Energy Prices and Strait of Hormuz Disruptions
Global oil and gas prices have increased this year as the Iran war disrupted shipments through the strategically important Strait of Hormuz.
Japan is particularly exposed to energy supply disruptions because it relies heavily on imports from the Middle East. Higher energy costs could increase pressure on households and businesses while affecting inflation and economic growth.
The Japanese yen has also faced significant pressure in recent months. In August, Tokyo and Washington reportedly confirmed joint intervention to slow the yen’s decline after the currency reached a fresh 40-year low.
The coordinated action marked the first joint intervention by Japan and the United States since 2011, when both countries intervened following the devastating earthquake and tsunami in eastern Japan.
Japan’s Ministry of Finance and US Treasury Secretary Scott Bessent said at the time that they would not rule out further joint intervention if necessary.
Bessent has also increased pressure on the Bank of Japan to raise interest rates to support the yen, urging Governor Kazuo Ueda to take appropriate action.
