Japan's central bank has increased its main interest rate to 1%, up from 0.75%. This is the highest level since 1995.
This decision follows a surge in global energy prices. It aims to normalise monetary policy after decades of near-zero rates. Other central banks globally have also raised interest rates this year due to rising costs. The conflict in Iran has pushed up living expenses worldwide.
This move is a significant shift for Japan. Interest rates were cut aggressively in the 1990s after property and share prices collapsed. Rates remained near zero for two decades as prices fell and economic growth was slow. The Bank of Japan (BOJ) began gradually raising rates in March 2024. That was the first hike in 17 years.
Japan economist Jesper Koll stated to the BBC, "After twenty years of deflation, Japan is now in an inflationary upcycle." He added, "Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy." The BOJ has been under pressure to control inflation. Prices were very low in Japan until recently. Higher energy prices have fueled inflation, affecting countries like Japan that import much of their oil and gas from the Middle East. Japan’s wholesale prices rose by over 6% in May compared to the previous year. This was the fastest increase in three years. However, Japan's overall inflation rate, which was 1.4% in April, remains below the BOJ's 2% target.
The BOJ acknowledged a risk of underlying inflation exceeding its price target. This is because medium and long-term inflation expectations continue to rise. Raising interest rates can help lower inflation. However, higher rates also make borrowing more expensive for the government and businesses. BOJ Governor Kazuo Ueda, though absent from the meeting due to illness, has expressed support for rate hikes. Prime Minister Sanae Takaichi, initially against rate hikes, has not publicly opposed the BOJ's recent pushes. This latest increase is the second since she took office.
The decision also aims to stabilise the Japanese yen. The yen has been weak against major currencies like the US dollar and the euro. University of California San Diego business professor Ulrike Schaede noted, "There has been a sense that the yen is too cheap and that raising its currency will not hurt." Despite the hike, Japan's interest rate is still low compared to other large economies. The US and UK have rates above 3%. Other central banks, such as Australia's, are also considering further hikes. This move by Japan could signal a "slow global realignment" in economic policy.