The BOJ lifted its policy rate to 1% on Tuesday, the first time it has reached that level since 1995, in a 7-1 board vote
KAZUHIRO NOGI / Getty Images
The Bank of Japan raised interest rates Tuesday, brining the country's benchmark borrowing cost to 1% — a level not seen in more than three decades — as the central bank continued tightening a cycle of monetary normalization it set in motion in 2024.
Of the eight board members who voted, only Toichiro Asada broke from the majority, pushing for rates to remain unchanged, CNBC reported. Rates had last been adjusted in December, when they were brought to 0.75%, making Tuesday's action the first adjustment in roughly six months.
The move comes as Japan contends with a weak yen and price pressures tied in part to the Iran war. Energy costs pushed Japan's producer price index up 6.3% year-on-year in May, a rate of increase the country had not seen in more than three years. According to the BOJ, government efforts to cushion households from elevated energy bills have kept consumer price growth under the 2% threshold, though the bank flagged that crude oil-driven cost increases are moving swiftly through wholesale channels and risk filtering through to a broad range of everyday goods.
April data showed core inflation at 1.4%, a figure that marked the fourth consecutive month running below the BOJ's 2% target and the weakest such reading since March 2022. The subdued reading reflects deliberate policy choices rather than organic disinflation with analysts pointing to measures such as scrapping the gasoline tax and eliminating tuition fees at public high schools as factors artificially depressing the index.
A persistently weak yen added to the pressure for tighter policy. Despite authorities deploying an estimated 11.7 trillion yen ($73.5 billion) in intervention last month, the currency failed to hold its gains and drifted back toward 160 per dollar, where it largely remained through June. Currency depreciation compounds the inflation problem by pushing up import bills and strains the public purse at a moment when Tokyo is trying to offset rising living costs through subsidy programs.
"Intervention without changing domestic monetary policy is like tapping the brake while keeping your right foot firmly on the accelerator," Jesper Koll, expert director at Tokyo-based financial services firm Monex Group, said.
Separately from its annual spending plan, the Takaichi government approved an additional 3 trillion yen in outlays aimed at protecting households from surging energy prices.
On the quantitative side, the BOJ announced that monthly JGB purchases will be wound down at a pace of 200 billion yen each quarter until the program stabilizes at 2 trillion yen per month, a level it intends to hold from April 2027 onward. Markets responded positively, with the Nikkei 225 gaining 0.46% and the yen edging up to 160.22 per dollar in the wake of the announcement.
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