Key facts
- The Bank of Japan raised its policy rate to 1%, the highest in 31 years.
- This is the fifth rate hike in the current cycle and the highest level since 1995.
- The move signals a shift towards tighter monetary policy to combat inflation and a weak yen.
- Deputy Governor Shinichi Uchida indicated potential for further rate increases.
- The BOJ will pause its bond taper program from April next year.
- Wholesale inflation in Japan reached a three-year high of 6.3% in May.
The Bank of Japan raised its benchmark interest rate to 1% on Tuesday, marking the highest level in 31 years and a significant step in its policy normalization. This move aligns the BOJ with other central banks tightening policy to combat inflation and signals a focus on taming price pressures exacerbated by energy shocks. Deputy Governor Shinichi Uchida indicated the BOJ would continue to raise rates, emphasizing the risk of inflation deviating upward from its 2% target. The decision, made by a 7-1 vote with Toichiro Asada dissenting, takes borrowing costs to levels not seen since 1995. The BOJ also decided to pause its bond taper program from April next year, continuing to buy roughly 2 trillion yen in Japanese government bonds monthly. Wholesale inflation in Japan spiked to a three-year high of 6.3% in May, indicating firms are passing on higher costs. A weak yen, which pushes up import prices, will also pressure the BOJ to continue rate hikes. The risk of the economy deteriorating sharply from the Middle East conflict has diminished due to progress in procuring alternative energy supplies.