The Bank of Japan raised its benchmark interest rate by 25 basis points to 1.25 percent on Friday, pushing borrowing costs to their highest level in 31 years as the country grapples with rising inflation, a persistently weak yen, and intensifying pressure from the United States to keep pace with other major central banks.
The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting from the hike, according to CNBC. Both are seen as reflationists and were appointed by Prime Minister Sanae Takaichi earlier this year. The outcome was widely expected, with almost 90 percent of economists surveyed by CNBC predicting the 25-basis-point tightening and correctly identifying the dissenters.
The move marked the first hike since June and represented a quickening in the BoJ’s rate-hike cycle. The previous increase came six months before that one; this one arrived after just three. Since beginning monetary policy normalization in March 2024, when the rate stood at minus 0.1 percent, the central bank has now raised rates six times in two and a half years, steadily pushing toward levels similar to those of other major economies.
Inflation at the center
In its statement, the BoJ said the hike was driven by a risk that inflation will deviate upward beyond its 2 percent target, CNBC reported. The central bank added that it aims to stabilize underlying inflation at around 2 percent so that price rises do not overshoot and adversely affect the Japanese economy afterward.
The inflation picture is mixed. Official figures published on Friday showed core consumer inflation fell to 1.7 percent in August from 1.8 percent in July, according to the BBC, while the headline inflation rate for August came in at 1.9 percent, CNBC reported. Core inflation held steady near the target, as companies continued passing rising costs for food and grocery items to consumers, Al Jazeera reported.
Japan is particularly vulnerable to energy-driven inflation. Global oil and gas prices have risen this year as the Iran war caused major disruptions to shipments through the Strait of Hormuz, the BBC reported. Japan is heavily reliant on energy from the Middle East, making those supply interruptions especially damaging. Rising energy prices, global supply pressures, and domestic inflation exceeding the 2 percent target are all driving factors, Al Jazeera reported.
Dissenter Asada argued that with core inflation below 2 percent, the economic situation may not be strong enough to warrant a hike, and he instead advocated for a hold, CNBC reported. Sato said current economic and price developments did not appear to have substantially accelerated compared with conditions before the meeting.
BoJ Executive Director Koji Nakamura described a slow-moving demographic shock on Monday, pointing to a shrinking labor pool that is lifting wages as a structural factor that cannot be dismissed as temporary, Al Jazeera reported. Japan faces a shrinking workforce alongside rising prices and a weak currency, compounding the central bank’s challenges.
International pressure builds
The Federal Reserve raised its benchmark interest rate on Wednesday for the first time in over three years, the BBC reported, and the prospect of another increase later this year has added pressure on the BoJ to keep pace, Al Jazeera reported. The European Central Bank raised its key rate to 2.5 percent last week, leaving Japan’s policy rate lower than both counterparts. Further widening of the U.S.-Japan rate gap risks weakening the yen and lifting inflation through higher import costs, analysts told Reuters, according to Al Jazeera.
The yen has been under sustained pressure. In August, Tokyo and Washington confirmed a joint intervention to halt a slide in the currency after it fell to a fresh 40-year low, the BBC reported. That coordinated action was the first since 2011, when both countries acted together to weaken the yen following the earthquake and tsunami that struck eastern Japan. Japan’s Ministry of Finance and U.S. Treasury Secretary Scott Bessent said at the time they would not hesitate to conduct more joint interventions.
Bessent has been ramping up pressure on the BoJ directly. He called on Governor Kazuo Ueda to do the right thing, the BBC reported, and at the G20 finance ministers and central bank governors meeting earlier this month told Ueda to take decisive market and monetary steps, CNBC reported. That pressure bears on Takaichi’s preference for an easy monetary policy and an expansionary fiscal policy, CNBC noted.
After the decision, the currency traded at 156.64, weakening 0.45 percent, while the benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947 percent, CNBC reported. BoJ Governor Kazuo Ueda’s post-meeting briefing will be closely watched by markets for clues on the timing and pace of further increases, Al Jazeera reported. Until recently, Japan had experienced very low inflation or deflation for around three decades, the BBC noted, making rising prices a relatively new development in the economy.