The Bank of Japan (BoJ) on Friday raised its key policy interest rate by 25 basis points to 0.75%, marking its highest level since 1995, in a widely expected move that signals further normalisation of its ultra-loose
monetary policy.
The decision was taken unanimously at the end of the central bank’s two-day policy meeting. In a statement, the BOJ said it would consider raising rates further if there are no major changes in the outlook for economic activity and prices.
The hike takes Japan’s benchmark short-term rate to a 30-year high, even as borrowing costs remain low by global standards. For decades, the BoJ has kept rates near or below zero in an effort to combat deflation and support growth after the collapse of Japan’s economic bubble in the early 1990s.
The move comes despite signs of weakness in the economy. Japan’s economy contracted at an annualised rate of 2.3% in the most recent quarter. However, improving business sentiment, sustained price pressures and expectations of continued wage growth appear to have convinced policymakers that conditions are in place to tighten policy further.
The BoJ only began raising interest rates in 2024, which is its first hike in 17 years, after inflation stabilized above its 2% target. When the COVID-19 pandemic hit, the policy rate stood at minus 0.1%.
The yen has remained under pressure, trading around 156 per dollar, near its weakest level in decades. The currency’s weakness has pushed up the cost of imported food, fuel and other essentials, squeezing household budgets as inflation has outpaced wage growth. A weaker yen has also been exacerbated by global investors moving funds into higher-yielding dollar assets, particularly those linked to the artificial intelligence boom.
Higher interest rates are expected to support the yen by attracting capital flows into yen-denominated assets. The latest hike signals the BOJ’s intention to continue gradually withdrawing monetary stimulus after years of aggressive easing, including large-scale bond purchases launched in 2013.
The BoJ had earlier delayed tightening amid uncertainty over the impact of US trade policy on Japanese exporters. Recent clarity on tariffs, including a deal that sets US duties on Japanese imports at 15%, has helped ease those concerns.
