Japan's Central Bank Raises Key Interest Rate to 31-Year High

The Bank of Japan (BOJ) has increased its main interest rate to 1.25%, marking a 31-year high and signaling a continued shift away from decades of ultra-low borrowing costs. This decision comes as Japan confronts mounting economic pressures, including rising inflation and a persistently weak yen.

The rate hike, effective Friday, moves from the previous 1% and is a level not seen since 1995. The BOJ has been gradually raising its benchmark rate since 2024, when it stood at negative 0.1%. This marks the sixth such increase in the last two and a half years, as the bank aims to align its monetary policy with that of other major economies.

Globally, central banks have been increasing interest rates to combat rising inflation, which has been exacerbated by higher energy prices. The US Federal Reserve recently raised its benchmark rate for the first time in over three years, and the European Central Bank also increased borrowing costs earlier this month.

Japan is particularly susceptible to global energy price fluctuations, with oil and gas prices rising due to disruptions in key shipping routes. The country's reliance on energy imports from the Middle East makes it vulnerable to supply interruptions.

Official figures released Friday indicated a slight decrease in Japan's core inflation rate, falling to 1.7% in August from 1.8% the prior month. While this rate is not high by international standards, it represents a relatively new development for an economy that has experienced low inflation or deflation for approximately three decades.

The yen has also faced significant pressure in recent months. In August, Japan and the United States jointly intervened to curb the yen's slide after it reached a 40-year low against the dollar. This coordinated intervention was the first since 2011. U.S. Treasury Secretary Scott Bessent has publicly urged the BOJ to raise interest rates to support the yen.