The Bank of Japan has raised its policy interest rate from 0.75% to around 1%, the highest level since 1995. The increase follows a rise in global energy prices and growing concerns that higher import costs could add to inflation in Japan.
The central bank’s Policy Board approved the increase by a 7-1 vote at its meeting on Tuesday. The new rate takes effect on June 17, according to the BOJ’s official policy decision.
Energy Costs Add Pressure on Prices
Japan relies heavily on imported oil and gas, leaving the economy exposed to higher energy prices linked to the war involving Iran. The BOJ said higher crude oil prices were weighing on economic activity while also increasing the risk of further price growth.
Japan’s producer prices rose 6.3% in May from a year earlier, the fastest annual increase in three years. The BOJ’s May price report showed that petroleum, coal, electricity, gas, chemicals, and nonferrous metals contributed to the monthly increase.
Consumer inflation remained lower, with Japan’s overall inflation rate at 1.4% in April. That figure was below the BOJ’s 2% target, according to the country’s Statistics Bureau.
Higher interest rates can limit inflation by making borrowing more expensive and reducing spending. They can also raise financing costs for companies and increase the government’s expenses on its large public debt.
BOJ Continues Gradual Rate Increases
Japan kept interest rates near zero for much of the past two decades as the economy faced weak growth and falling prices. The BOJ began moving away from negative rates in March 2024, when it approved its first rate increase in 17 years.
The latest increase is the second since Prime Minister Sanae Takaichi took office. Although Takaichi has previously opposed higher rates and supported increased government spending, she has not publicly challenged the BOJ’s recent decisions.
BOJ Governor Kazuo Ueda missed the meeting while receiving hospital treatment for an infected liver cyst. Before his hospitalization, Ueda said policymakers would need to discuss another increase if inflation risks became greater than the risks to economic activity.
Higher Rate May Support the Yen
The BOJ is also seeking to limit pressure on the yen, which has weakened against currencies including the U.S. dollar and euro. A higher interest rate can make yen-denominated assets more attractive, although Japan’s borrowing costs remain below those of other large economies.
Interest rates in the United States and United Kingdom remain above 3%. Their central banks are expected to keep rates unchanged at meetings scheduled this week.
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