Japan raises interest rates to highest level in more than 30 years
The Bank of Japan has increased its main interest rate from 1% to 1.25% as the country confronts higher energy costs, a weak yen and renewed inflationary pressure.
By BBC News
Japan's central bank has raised interest rates to their highest level since 1995 as policymakers respond to inflationary pressure and the impact of rising global energy prices.
The Bank of Japan increased its main interest rate from 1% to 1.25% following a two-day monetary policy meeting.
The decision represents another significant step away from the ultra-low and negative interest rates that defined Japanese monetary policy for decades.
As recently as 2024, Japan's main interest rate stood at minus 0.1%.
Since then, the Bank of Japan has gradually tightened monetary policy as inflation returned and economic conditions began moving away from the prolonged period of weak price growth that had shaped the country's economy.
The latest move is the sixth increase in around two and a half years.
Japan's situation remains unusual compared with many other major economies.
While central banks including the Bank of England and US Federal Reserve previously raised borrowing costs aggressively to control inflation, Japan maintained exceptionally low rates for much longer as it attempted to encourage economic growth and sustained increases in prices and wages.
That position has increasingly changed.
Japan is now dealing with a combination of higher living costs, a weak currency and substantial increases in the price of imported energy.
Core inflation eased to 1.7% in August from 1.8% in July, putting it slightly below the Bank of Japan's 2% target.
However, policymakers are also considering the risk that higher oil and gas prices could create renewed inflationary pressure.
Japan is particularly exposed to movements in global energy markets because it imports much of the fuel required by its economy.
A substantial proportion of those supplies comes from the Middle East, making disruption to oil and gas markets particularly important for Japanese businesses and households.
The weakness of the yen creates another complication.
A weaker currency makes imported goods more expensive in yen terms, potentially amplifying increases in the cost of oil, gas, food and other products purchased from overseas.
Japan and the United States took the unusual step of jointly intervening in currency markets in August in an effort to support the yen after it fell to its weakest level against the dollar in around four decades.
It was the first coordinated intervention involving the two countries since 2011.
Higher Japanese interest rates can potentially provide additional support for the yen by reducing the substantial gap between borrowing costs in Japan and other major economies.
However, increasing rates also raises financing costs for Japanese households, businesses and the government.
The decision therefore reflects a difficult balance for policymakers between controlling inflation and avoiding unnecessary damage to economic growth.
Japan also faces longer-term structural challenges, including an ageing and shrinking population and persistent labour shortages.
For international markets, the shift in Japanese monetary policy is significant because extremely low Japanese borrowing costs have influenced global investment flows for many years.
Investors have historically been able to borrow cheaply in yen and invest that money in countries offering higher returns, a strategy commonly known as the yen carry trade.
As Japanese interest rates rise, the economics of those transactions can change, potentially affecting currencies, bonds and other financial markets well beyond Japan.
The latest increase to 1.25% therefore represents more than a domestic interest-rate decision.
It is another indication that one of the world's longest experiments with ultra-low borrowing costs is continuing to unwind as Japan adjusts to a markedly different inflation and interest-rate environment.