Japan's main policy rate rose to 1.25% on Friday, the highest level since 1995, as the Bank of Japan continues to move away from decades of ultra-low borrowing costs. The increase, from 1% to 1.25%, marks the sixth hike in roughly two and a half years and follows a steady campaign of rate rises that began in 2024, when policy was at minus 0.1%.
The decision comes amid a wave of tightening by major central banks. The US Federal Reserve raised its benchmark rate this week for the first time in more than three years, and the European Central Bank also increased borrowing costs earlier in the month. The BOJ and its peers have cited higher energy prices, linked in part to disruptions from the Iran war, as a factor pushing inflation higher.
Official data published on Friday showed core inflation easing slightly in August, to 1.7% from 1.8% the prior month, but remaining close to the BOJ's 2% target. While Japan's inflation rate remains modest by international standards, persistent price rises represent a significant shift after roughly three decades dominated by very low inflation or deflation.
When a central bank raises interest rates, its currency generally becomes more attractive to traders and tends to strengthen. Japan has faced a weak yen in recent months, including a slide to a fresh 40-year low in August that prompted a coordinated intervention by Tokyo and Washington, the first joint action since 2011. At the time, Japan's Ministry of Finance and US Treasury Secretary Scott Bessent said they would not hesitate to conduct more joint interventions if needed, and US officials have urged BOJ Governor Kazuo Ueda to raise rates.
The BOJ's move narrows the gap between Japanese borrowing costs and those of other major economies, while keeping policymakers focused on whether inflation will move sustainably toward the 2% target. Officials have signalled readiness to act on the currency, and markets will now watch whether the yen strengthens and how the inflation trend evolves following this latest hike.
