Bank of Japan raises policy rate to 1%, highest in over 30 years

Tokyo: The Bank of Japan (BOJ) on Tuesday raised its key policy interest rate to 1%, marking the highest level in more than 30 years and signaling a continued shift away from ultra-loose monetary policy.

The decision came largely in line with market expectations and reflects the central bank’s ongoing normalization cycle that began in 2024.

The move represents the BOJ’s first rate hike since December, when it lifted rates to 0.75%, and the first time since 1995 that borrowing costs have reached the 1% level.

The decision was approved by a 7–1 majority, with board member Toichiro Asada dissenting and supporting a hold at 0.75%. The central bank said the move reflects growing attention to inflation dynamics and currency stability.

Financial markets showed a measured response. The Nikkei 225 index rose 0.46%, while the Japanese yen strengthened slightly to 160.22 against the US dollar. Meanwhile, 10-year Japanese Government Bond yields increased by 3 basis points to 2.615%.

Alongside the rate hike, the BOJ confirmed it will continue reducing government bond purchases by 200 billion yen per quarter. The central bank plans to stabilize monthly bond buying at 2 trillion yen from April 2027, signaling a gradual but steady reduction of monetary support.

The BOJ noted that consumer inflation remains below its 2% target, partly due to government measures aimed at easing household energy costs. However, producer prices rose 6.3% in May, the fastest pace in over three years, driven mainly by higher energy costs, indicating persistent upstream inflation pressures.

The policy decision comes amid continued weakness in the Japanese yen, which has hovered near the 160 level against the US dollar despite recent intervention efforts. A weaker currency supports exports but raises import costs, adding to inflationary pressure and complicating policy management.

Japan’s core inflation eased to 1.4% in April, below the BOJ’s 2% target for the fourth consecutive month. However, analysts note that government subsidies and tax relief measures have helped suppress headline inflation readings.

Prime Minister Sanae Takaichi’s administration has also introduced fiscal support measures worth 3 trillion yen to ease pressure on households facing rising living costs.

While the rate hike signals growing confidence in Japan’s inflation trajectory, policymakers continue to face a delicate balancing act between supporting economic growth, stabilizing the currency, and maintaining price stability.