Japan raises interest rate to 31-year high over inflation risks

The Bank of Japan raised its benchmark interest rate by 25 basis points to 1.25% on Friday, its highest level since 1995, citing the risk of inflation exceeding its target.

The hike, widely expected by economists, accelerated the central bank’s monetary policy normalization cycle. It came three months after the previous increase, compared with the six-month interval preceding that move.

The decision was approved by a 7-2 majority, with board members Toichiro Asada and Ayano Sato voting to keep the rate unchanged.

The central bank said it decided to tighten policy because of the risk that inflation could deviate upward beyond its 2% target.

It added that it aims to stabilize underlying inflation at around 2%, preventing price increases from overshooting the target and subsequently hurting the Japanese economy.

The decision came as Japan grapples with persistent price pressures and a weak yen.

Japan’s annual consumer inflation rate stood at 1.9% in August, while core inflation, which excludes fresh food prices, eased to 1.7% from 1.8% in July.

Asada argued that the economy might not be sufficiently strong because core inflation remained below the central bank’s target, while Sato said economic activity and price developments had not accelerated substantially compared with earlier conditions.

The Japanese yen weakened following the decision, with the dollar gaining about 0.5% to trade above 156.6 yen. The yield on Japan’s benchmark 10-year government bond fell around 5 basis points to approximately 2.95%.

The hike extended the bank's shift away from years of ultra-loose monetary policy, which began when the bank ended its negative interest-rate policy in March 2024.