The Bank of Japan (BOJ) increased its benchmark interest rate from 1.00% to 1.25% on Friday, the highest level since 1995. The move follows a series of hikes that began in 2024 when the rate stood at –0.10% and has been raised six times in the past two and a half years.
Japan’s decision comes as major central banks worldwide are tightening policy to counter inflation driven by higher energy prices linked to the Iran war. Earlier this month, the U.S. Federal Reserve and the European Central Bank also raised rates, marking a coordinated global effort to curb price rises.
Official data released before the BOJ announcement showed core inflation easing slightly to 1.7% in August from 1.8% in July, yet the figure remains close to the bank’s 2% target. Japan has historically enjoyed very low inflation or even deflation for about three decades, making the current price surge a relatively new challenge.
The yen has weakened sharply, prompting Tokyo and Washington to intervene jointly in August to stop a slide to a 40‑year low. The coordinated intervention was the first since 2011 and signals continued pressure on the currency. U.S. Treasury Secretary Scott Bessent has urged the BOJ to raise rates to support the yen, urging Governor Kazuo Ueda to “do the right thing.”
With rising global oil and gas prices due to disruptions in the Strait of Hormuz, Japan’s heavy reliance on Middle Eastern energy imports adds to the inflationary pressure. The BOJ’s hike is expected to strengthen the yen and signal a shift toward a more conventional monetary stance.
Market participants will watch the BOJ’s next policy meeting for clues on whether further rate increases are likely, as the bank balances inflation control with the need to support a slowing economy.
