Market AnalysisJun 18, 20262 Min

Bank Of Japan Raises Interest Rates to Highest Level in 30 Years

Japan's central bank pushed interest rates to a 31-year high on Tuesday, underscoring its determination to normalise policy amid rising concerns over inflation fuelled by higher energy prices following the Iran conflict.

The move marked the central bank's first rate increase since December and brought it further into line with global policymakers, including the European Central Bank, that have tightened monetary settings in response to persistent inflation.

Following two days of policy discussions, the Bank of Japan opted to raise its key interest rate by 25 basis points to 1%. The decision pushes the rate to its highest level since 1995 and represents the fifth hike since negative borrowing costs were phased out in March 2024.

A majority of board members supported the move, resulting in a 7-1 vote. Governor Kazuo Ueda was unable to participate because of ongoing hospital treatment. Toichiro Asada, appointed to the board in April, opposed the decision, arguing that threats to economic growth linked to the Middle East situation were more serious than the risk of rising prices.

In outlining its decision, the Bank of Japan said the threat of a severe economic downturn stemming from tensions in the Middle East had eased. The central bank pointed to government measures aimed at shielding households from soaring fuel prices, alongside advances in securing alternative energy sources.

However, it warned that inflation risks remain elevated as businesses continue to pass higher oil costs through supply chains at a rapid rate, potentially driving up prices across a broad range of consumer goods.

"Taking into account that medium- and long-term inflation ⁠expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target," the BOJ said, reported Reuters.

Raising rates could provide a tool to curb rising prices, but it would also make loans more expensive, potentially increasing costs across the corporate sector and for public finances.

The BOJ also said it will pause its plan to reduce bond purchases from April 2027. It will continue buying around ¥2 trillion, or about $12.5 billion, of Japanese government bonds every month.

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