Japan raises interest rate to highest for 31 years
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- Bank of Japan raised its policy rate to 1% from 0.75%, the highest level since 1995, its second hike since PM Takaichi took office and the latest in a series of moves that began with March 2024's first rate increase in 17 years.
- BOJ Governor Kazuo Ueda missed this week's meeting due to hospitalization for treatment of an infected liver cyst, though he had previously signaled openness to further hikes if upside price risks outweigh downside activity risks.
- Japan's wholesale prices climbed more than 6% year-over-year in May — the fastest pace in three years — even as overall inflation sat at 1.4% in April, below the BOJ's 2% target.
- Prime Minister Sanae Takaichi, a known fiscal dove who previously dismissed rate hikes, has not publicly criticized the BOJ's push for higher rates since taking office, despite her support for boosting government spending.
- The BOJ cited the Iran war's energy-price impact as a factor pushing up costs for import-dependent Japan, but said government fuel-subsidy measures make a sharp economic deterioration unlikely, while warning underlying inflation could deviate above target.
- The yen has come under pressure from the US dollar and euro, and economist Ulrike Schaede said the BOJ appears to view a stronger currency as unlikely to hurt, with the hike still leaving Japan's rate well below the US and UK's above-3% levels.
Why it matters: The hike lifts Japan's rate above 1% for the first time in three decades, fundamentally ending the era of crisis-mode monetary policy, but leaves the BOJ with a narrow path: higher rates strengthen the yen and cool inflation, yet they also raise borrowing costs for the government and businesses still adjusting to life after deflation.
