- The Bank of Japan raised its policy rate to 1%, the highest level since 1995.
- This marks its fifth hike since March 2024, when major policy changes began.
- The central bank would keep cutting bond purchases by 200 billion yen per quarter.
Japan’s central bank has raised interest rates to 1%, marking the highest level since 1995. The move follows a major policy change that started in March 2024 when the Bank of Japan ended years of ultra-low rates and delivered its first increase in 17 years.
The quarter-point increase from 0.75% to 1% is the fifth rate hike since the end of negative rates and the first increase since December. Markets had largely expected the decision, with pricing before the meeting showing a probability above 99%.
BOJ Continues Policy Normalization
The Bank of Japan approved the move by a 7-1 vote. Board member Toichiro Asada opposed the hike and favored keeping rates at 0.75%.
Governor Kazuo Ueda did not attend the two-day policy meeting because he is receiving treatment for an infected liver cyst. Deputy Governor Shinichi Uchida will handle the post-meeting briefing.
The central bank confirmed that it will continue reducing purchases of Japanese government bonds by 200 billion yen every quarter. The taper will end in April 2027, after which monthly bond purchases will stay at 2 trillion yen.
Tuesday’s increase follows the December move to 0.75%. Prime Minister Sanae Takaichi has previously voiced concerns over higher borrowing costs, but she has not publicly criticized the latest tightening path.
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Rising Energy Costs Drive Inflation Concerns
Japan spent decades with near-zero interest rates after the collapse of property and stock prices in the 1990s. Inflation remained weak for years, but rising energy costs and a weak yen have changed the outlook.
The Iran conflict pushed oil prices higher, creating more pressure on countries that rely heavily on imported energy. Japan remains dependent on oil and gas supplies from the Middle East.
As per reports, producer prices rose 6.3% in May from a year earlier, the fastest pace in more than three years. Wholesale prices also climbed by more than 6%. Consumer inflation stood at 1.4% in April, below the Bank of Japan’s 2% target.
Government measures, including energy subsidies and tax changes, have helped keep inflation lower. The central bank warned that higher crude oil prices are already moving through business costs and may spread to a broader range of consumer goods.
Takaichi’s government has introduced an additional 3 trillion yen budget to help households deal with rising energy costs.
Yen Support and Market Reaction
The Bank of Japan is also trying to support the yen. Japan reportedly spent 11.7 trillion yen on intervention measures in May, but the currency weakened again and traded around 160 against the US dollar during much of June.
After Tuesday’s decision, the yen strengthened slightly to 160.22 per dollar. Japan’s Nikkei 225 gained 0.46%, while yields on 10-year government bonds rose three basis points to 2.615%.
Japan’s rates remain low compared with other major economies. Interest rates in the United States and the United Kingdom are still above 3%, with both central banks expected to leave policy unchanged this week.
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