Key facts
- The Bank of Japan raised its main interest rate to 1.25% from 1%.
- This is the highest level the rate has reached since 1995.
- The BOJ has been raising rates since 2024, lifting its base rate out of negative territory.
- Japan's core inflation eased to 1.7% in August.
- The yen weakened about 0.7% against the dollar on Friday.
- Two board members dissented to the rate increase.
The Bank of Japan increased its main interest rate to 1.25% from 1%, marking a fresh 31-year high as it attempts to combat rising inflation and a weakening yen. This move aligns Japan with other major central banks, including the US Federal Reserve and the European Central Bank, in tightening monetary policy.
The BOJ has been raising rates since 2024, when it lifted its base rate out of negative territory. This latest hike is the sixth in the past two and a half years, bringing the rate to a level not seen since 1995. The central bank aims to bring its policy closer to that of other major economies.
Japan's core inflation eased slightly to 1.7% in August from 1.8% in July, remaining close to the BOJ's 2% target. While this inflation rate is not high by international standards, rising prices are a relatively new phenomenon in Japan, which has experienced low inflation or deflation for about three decades.
The yen weakened about 0.7% against the dollar on Friday. In August, Tokyo and Washington confirmed a joint intervention to halt the yen's slide after it hit a 40-year low. US Treasury Secretary Scott Bessent has publicly urged the BOJ Governor Kazuo Ueda to raise interest rates to support the yen.
The vote to raise rates was not unanimous, with two board members dissenting. Fred Neumann, chief Asia economist at HSBC, noted that the dissent leaves doubts about further tightening, while Prashant Newnaha, a senior rates strategist at TD Securities, believes back-to-back hikes are unlikely.