Bank of Japan lifts rates to 1%, highest since 1995

The Bank of Japan raised its benchmark interest rate by 0.25 percentage points to 1%, the highest level in 31 years, in a move aimed at countering inflation. The decision matched analysts’ expectations and follows years of ultra-low borrowing costs, including negative rates until 2024. It is the first increase since December, when the rate was lifted to 0.75%, and the first time it has reached 1% since 1995.

The tightening comes as Japan faces a weak yen and renewed inflation pressures, which have intensified in part because of the war in Iran. In its statement, the bank said, “Price increases stemming from higher crude oil prices are progressing relatively quickly in business-to-business transactions, which could spread to consumer prices across a wide range of items.” Japan’s producer price index rose 6.3% in May, the fastest pace in more than three years.

To help households cope with rising energy costs, the government approved an extra budget of 3 trillion yen. The weak currency was another reason for the rate increase. In May, the bank intervened in the market and spent 11.7 trillion yen, or $73.5 billion, to support the yen, but the currency weakened again this month. Jasper Cole of Monex Group in Tokyo told CNBC, “Intervention without changing domestic monetary policy is like stepping on the gas in neutral.”

Markets reacted positively, with the Nikkei 225 rising after the announcement and the yield on 10-year Japanese government bonds increasing by 3 basis points to 2.615%. The central bank also said it will keep reducing purchases of government bonds by 200 billion yen each quarter and will end the program entirely in April next year. The two-day policy meeting was held without Governor Kazuo Ueda, who is hospitalized with a liver illness and did not take part in the vote; he is expected to return for the July meeting.