Japan’s central bank has increased its benchmark interest rate to 1%, a level last seen more than three decades ago. The move, decided at the conclusion of a two-day board meeting on Tuesday, continues the Bank of Japan’s shift toward policy normalization that began in 2024.
The Bank of Japan raised its policy rate, specifically the uncollateralized overnight call rate, by 0.25 percentage points. This marks the fifth time the central bank has tightened rates since ending its negative rate approach in March 2024. The decision followed a 7-1 vote among board members, with Toichiro Asada expressing a preference to keep rates unchanged at 0.75%.
The policy move from Japan’s central bank comes immediately before the Federal Reserve’s monetary policy announcement, where markets anticipate no change in U.S. rates.
This latest tightening measure comes amid ongoing concerns around inflation pressures and a weak yen, both exacerbated by recent instability in the Middle East, which disrupted energy markets and heightened fears of rising prices.
BOJ Governor Kazuo Ueda and other policymakers had previously signaled that further hikes could be considered if risks to inflation outweighed concerns over sluggish economic growth. Earlier in June, Ueda indicated that policy changes would be debated thoroughly under those circumstances.
Despite government intervention of JPY 11.7 trillion in the currency market in May, the yen remained under pressure, hovering near 160 per US dollar through June.
In addition to the rate hike, the Bank of Japan also outlined changes to its asset purchase program. While bond purchases will continue to be reduced by JPY 200 billion each quarter through the start of 2027, the central bank plans to halt this tapering process in April 2027, maintaining monthly Japanese government bond buying at JPY 2 trillion thereafter.
