Japan’s central bank has raised interest rates to their highest level in more than three decades, marking another major step away from the ultra low borrowing costs that defined the country’s economy for years.
The Bank of Japan on Tuesday increased its main policy interest rate from 0.75 percent to 1 percent, its highest level since 1995, as rising global energy prices continue to add pressure to the cost of living.
According to BBC, the move comes at a time when higher oil and gas prices, driven partly by tensions linked to the US Israel conflict with Iran, have pushed several countries to tighten monetary policy to contain inflation.
For decades, Japan maintained extremely low interest rates after the collapse of its property and stock market bubble in the 1990s triggered a long period of weak growth and falling prices. The country only began raising rates again in March 2024, its first increase in 17 years.
“After twenty years of deflation, Japan is now in an inflationary upcycle,” Jesper Koll, a Japan economist, told BBC.
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“Emergency crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy,” he added.
The Bank of Japan has faced growing pressure to control inflation, particularly as the country relies heavily on energy imports from the Middle East. Japan’s wholesale prices rose by more than 6 per cent in May compared with a year earlier, the fastest increase in three years.
However, the country’s overall inflation rate stood at 1.4 percent in April, below the BOJ’s 2 percent target.
The central bank said the risk of the Iran conflict causing a severe economic downturn had reduced due to government measures aimed at protecting households from high fuel costs. However, it warned that rising long term inflation expectations could push underlying inflation above its target.
The decision highlights a difficult balancing act for policymakers. Higher interest rates can help slow rising prices, but they also make borrowing more expensive for businesses and increase costs for the government.
BOJ Governor Kazuo Ueda did not attend this week’s meeting as he remains in hospital receiving treatment for an infected liver cyst. Despite his absence, he and other policymakers have recently signalled stronger support for further rate increases.
“Even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate,” Ueda said earlier this month.
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Sanae Takaichi, the Prime Minister, who has traditionally supported increased government spending, had previously opposed higher interest rates but has not openly criticised the central bank’s recent tightening measures.
The latest increase is the second rate rise since Takaichi took office and had been widely expected following the BOJ’s increase to around 0.75 percent in December.
The rate rise is also expected to support the Japanese yen, which has weakened against major currencies such as the US dollar and euro.
“There has been a sense that the yen is too cheap and that raising its value will not hurt,” Ulrike Schaede, a business professor at the University of California San Diego, told BBC.
Despite the latest increase, Japan’s interest rate remains lower than those of many major economies. Interest rates in the United States and the United Kingdom remain above 3 percent, while Australia kept its rate unchanged at 4.35 percent but signalled that further increases remain possible if inflation pressures continue.
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