The Bank of Japan (BOJ) increased its benchmark interest rate to 1.25% on Friday, marking a 31-year high and its fastest pace of rate hikes since 1990. This decision, widely anticipated, aimed to curb persistent inflation, which has been nearing the bank's 2% target, and address the impact of a weak yen. The BOJ's policy rate was raised by a quarter point from 1%, with the board voting 7-2 in favor, though board members Toichiro Asada and Ayano Sato dissented.
This move aligns the BOJ with other major central banks, such as the US Federal Reserve, which recently raised its benchmark rate for the first time in three years, and the European Central Bank, which also increased borrowing costs this month. The global trend of rate hikes is largely attributed to higher energy prices resulting from the Iran war, which have disrupted shipments through the Strait of Hormuz and pushed up inflation worldwide. Japan, heavily reliant on Middle Eastern energy, is particularly vulnerable to these supply interruptions.
The BOJ has been gradually raising rates since 2024, when the rate stood at minus 0.1%, implementing six hikes in the last two and a half years. Despite these increases, the BOJ's policy rate remains lower than the ECB's 2.5% and the Fed's 3.75%-4.00% range, contributing to a still-weak yen. The weak yen, coupled with surging energy costs, has led to elevated wholesale inflation, which is now spilling over into consumer prices.
Japan faces several economic challenges, including a persistently weak yen, rising prices, and a shrinking workforce. In August, core inflation eased slightly to 1.7% from 1.8% but remains close to the 2% target. The country also experienced a joint intervention in August by Tokyo and Washington to halt the yen's slide after it hit a 40-year low. US Treasury Secretary Scott Bessent has notably pressured the BOJ to raise rates to support the yen, advocating for "decisive" monetary steps.
