Japan’s central bank has raised its main interest rate to its highest level in three decades, tightening monetary policy as the country grapples with persistent inflation and rising living costs. The Bank of Japan increased its benchmark rate to around 0.75%, a move that comes as policymakers balance the need to curb inflation against concerns over higher government borrowing costs.
In a widely expected decision on Friday, the BOJ’s policy board, led by governor Kazuo Ueda, approved a quarter-point increase. It marks the first rate hike since January and the first increase since both Ueda and Prime Minister Sanae Takaichi assumed their current roles.
The decision carries political and economic significance. Takaichi has emphasised the need to bring inflation under control, even as her government remains sensitive to the cost of servicing Japan’s large public debt. Higher interest rates tend to support a country’s currency, and in Japan’s case, could help ease inflation by strengthening the yen, which has fallen sharply against currencies such as the US dollar and the euro. The weaker yen has raised the cost of imports and contributed to price pressures.
At the same time, higher rates increase borrowing costs for the government. Takaichi previously criticised the idea of rate increases, calling them “stupid” last year, though she has not publicly opposed Ueda’s approach since taking office in October. Rising prices have weighed on public support for her Liberal Democratic Party, making inflation control a political priority.
Data released on Friday showed that Japan’s inflation rate excluding food and fuel rose by 3% in November. That figure remains above the BOJ’s long-standing target of 2%.
Some economists question how much impact the rate rise will have. Shoki Omori, chief strategist at Mizuho in Tokyo, told the BBC that the move is unlikely to significantly reduce inflation, as financial markets had already priced it in and the yen remains relatively weak.
Most analysts expect the BOJ to raise rates once more next year, potentially reaching 1%. Economists say the current decision reflects a major change from decades of ultra-low interest rates in Japan. Julia Lee of Pacific FTSE Russell, part of the London Stock Exchange Group, said the move highlights how policymakers are moving away from nearly 30 years of exceptionally low borrowing costs.
Others caution that further increases may not come quickly. Shigeto Nagai, head of Japan economics at Oxford Economics, said the central bank is likely to wait around six months to assess the impact of the latest hike on the real economy before deciding on another move.
Japan’s rate increase contrasts with actions taken by other major central banks. On Thursday, the Bank of England cut its main interest rate to 3.75%, the lowest level since February 2023. The US Federal Reserve also reduced rates last week for the third time this year, lowering its target range by 0.25 percentage points to between 3.50% and 3.75%, its lowest level in three years, even as internal disagreements cloud expectations for further cuts.
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