Japan's Key Interest Rate Enters 1% Range for First Time in 31 Years to Counter Inflation

Japan's central bank, the Bank of Japan (BOJ), raised its benchmark interest rate at its monetary policy meeting on Tuesday, marking the first rate hike in six months.

According to Kyodo News and other reports, the BOJ decided at its two-day monetary policy meeting, which began the previous day, to raise its short-term policy rate—the benchmark interest rate—by 0.25 percentage points from the current "around 0.75%" to "around 1%."

Seven out of the eight policy board members who attended the meeting voted in favor of the rate hike.

As a result, Japan's benchmark interest rate has reached its highest level in 31 years, since September 1995.

In 1995, Japan's de facto benchmark interest rate was cut from 1.75% to 1.0% in April, and was further lowered from 1.0% to 0.5% in September.

Since then, Japan's benchmark interest rate had never exceeded 0.5%.

The BOJ ended its negative interest rate policy in March 2024 for the first time in 17 years, and raised the benchmark rate from 0 to 0.1% to "around 0.25%" in July of the same year.

It raised the rate to "around 0.5%" in January last year and to "around 0.75%" in December.

The decision is analyzed to be driven by the BOJ's assessment that the risk of rising inflation outweighs the potential for an economic slowdown caused by instability in the Middle East.

In its statement released on Tuesday, the BOJ assessed, "Although the Japanese economy has shown some weakness due to the impact of the situation in the Middle East, it is recovering moderately."

However, it pointed out, "On the price front, while the year-on-year rate of increase in consumer prices is expected to remain below 2% for the time being due to the effects of government measures to ease energy burdens, the pass-through of costs in business-to-business transactions is progressing at a somewhat rapid pace due to rising crude oil prices. This could potentially ripple into price increases for a wide range of items at the consumer level in the future."

Regarding future monetary policy, the bank also hinted at the possibility of continuing its rate-hiking cycle, stating, "We will continue to raise the policy rate and adjust the degree of monetary accommodation in accordance with economic, price, and financial developments."

At its meeting in April, the BOJ held off on raising rates to monitor the situation, judging that surging crude oil prices could affect both inflation and economic slowdown.

Prior to the meeting, expectations had been dominant in financial markets that the BOJ would raise its policy rate, as price hikes spread to various products and the yen's weakness persisted.

Kazuo Ueda, Governor of the Bank of Japan, had also hinted at a rate hike this month during a speech on June 3, saying, "Even amid the uncertain situation in the Middle East, we need to thoroughly discuss the appropriateness of a rate hike."

Although downward pressure is being exerted on international crude oil prices following a tentative agreement on a ceasefire between the United States and Iran the previous day, the rise in raw material prices caused by the Middle East situation so far is highly projected to lead to price hikes for final products with a time lag.

As this rate hike was somewhat expected, the key focus now is the BOJ's willingness to continue raising interest rates after this meeting.

Therefore, market attention is focused more on the press conference by Deputy Governor Shinichi Uchida scheduled for this afternoon, rather than the rate hike itself.

Governor Ueda has been hospitalized since June 9 due to a liver illness and did not attend this meeting.

It is reportedly the first time since 1998 that the governor has been absent from a regular policy-setting meeting.

Governor Ueda, who was unable to attend, did not have voting rights; thus, only eight of the nine policy board members participated in the meeting.

Governor Ueda is expected to express his views in writing.

(Photo: AP, Yonhap News)
※ Please note: This article was translated by AI and may contain errors.