Bank of Japan Raises Rates to 30-Year High
The Bank of Japan has raised its benchmark short-term interest rate to 0.75%, taking borrowing costs to their highest level in around three decades. The decision marks a significant step in Japan’s gradual exit from years of ultra-loose monetary policy aimed at combating deflation and weak growth.
Inflation and wages drive policy change
The rate hike reflects the central bank’s assessment that inflation has remained sustainably above its 2% target, supported by improving wage growth across sectors. Policymakers noted that price pressures are no longer driven solely by imported costs but are increasingly supported by domestic demand and corporate pricing power. Despite the increase, interest rates in Japan remain low compared to other major economies.
Market reaction and yen movement
Following the announcement, the Japanese yen weakened against the US dollar as markets focused on the cautious tone adopted by the central bank regarding future tightening. Government bond yields rose, with investors adjusting expectations to reflect a slow but steady normalisation of monetary policy. The Bank of Japan indicated that financial conditions would remain accommodative for now, with further moves dependent on economic data.
Broader economic context
Japan has maintained negative or near-zero interest rates for much of the past 30 years to counter deflationary pressures. The latest decision underscores a broader shift in policy thinking as inflation stabilises and wage negotiations deliver stronger outcomes. Analysts expect the central bank to proceed carefully, balancing inflation control with the need to support economic growth.
