Japan raises interest rates to 31-year high to curb impact of rising prices

Increase from 1% to 1.25% follows US Federal Reserve and European Central Bank tightening monetary policy

Japan’s central bank has increased interest rates to a fresh 31-year high as it attempts to combat global inflation linked to the war in Iran.

The Bank of Japan (BoJ) voted to raise its target interest rate from 1% to 1.25%, the highest level since 1995.

The move meant the BoJ joined the US Federal Reserve and the European Central Bank in tightening monetary policy this month, as central banks attempt to curb the impact of rising prices, linked to the conflict in the Middle East.

The Bank of England on Thursday voted to leave UK interest rates on hold at 3.75% but warned they could soon rise amid the fallout from the Iran war.

The BoJ policy committee’s vote to raise rates was not unanimous – with two of the nine board members dissenting against the increase.

Kazuo Ueda, the governor of the BoJ, would not rule out the possibility of back-to-back rate rises by the bank’s policy committee.

“That depends on how price conditions develop,” he said. “There could be various possibilities. We shouldn’t rule anything out. We’re at a phase where we need to look at various data carefully. But that doesn’t mean we can move slowly. We will analyse data carefully and take timely action as needed.”

The BoJ’s policy committee meets eight times a year, roughly once every six weeks, and Ueda said there is no set plan for the timing of any future potential increases in the rate.

“As for the pace of future rate hikes, we don’t have any pre-set idea in mind such as once every three months,” he said. “We will determine at each policy meeting how best to ensure underlying inflation stabilises ‌at 2%.”

Ueda said the BoJ has changed its policy of trying to boost inflation in the economy to focusing on ensuring it does not go above its target of 2%. In August the rate of inflation in Japan was 1.9%.

“Up until ​now, our short-term ‌policy focus was ​to push ​up underlying inflation from levels below 2%,” he said. “Now, underlying inflation is approaching 2%. If risks of underlying inflation overshooting 2% materialise, that could have a negative impact on Japan’s economy. It’s important to stabilise underlying inflation at 2% .”

The BoJ has been raising rates since 2024, when it lifted its base rate out of negative territory. It has been under pressure to raise borrowing costs as the yen weakened steadily against the dollar this year. The Japanese currency weakened more than 1% against the dollar on Friday.

Earlier this month, Scott Bessent, the US Treasury secretary, warned currency traders not to bet against the yen, after an intervention by the US and Japan at the end of July to stabilise the weakening Japanese currency.

“I have asymmetric information. I am the house now,” Bessent said, adding that he had “pretty good insight” into what Japanese policymakers were going to do. “You can bet against me if you want.”

In late July the US Treasury moved to sell at least $10bn in euros , without informing the European Central Bank, to buy yen to arrest its slide to a 40-year low.

Fred Neumann, the chief Asia economist at HSBC, said: “The tone of the [BoJ] statement, along with two dissenters for the decision to raise rates, leaves lingering doubts that Japan’s central bank will be cautious in tightening monetary policy further.

“While back-to-back hikes appear unlikely, investors will look for clues as to whether officials are prepared to raise interest rates again in December.”

The drop in ​the yen helped the Nikkei stock market index to rise nearly 2%, while the Japanese two-year government ‌bond yields, which are most sensitive to ‌monetary policy expectations, fell four basis points to 1.82%.

European stock markets were down 0.5% on Friday after the BoJ’s decision.

Prashant Newnaha, a senior rates strategist at TD Securities, said the BoJ reiterated its concerns that underlying inflation could deviate upwards from its 2% target, but “we don’t see a smoking gun supporting a back-to-back hike ‌in October”.

He said: “We stick with our call for rate hikes roughly every quarter with the next 25 basis points hike in December.”

Hopes of ​alternative ways for oil supply from the Middle East to ​reach markets pushed Brent crude futures down as much as 1.5% to $103.29 a barrel even as concerns about strikes between Saudi Arabia and ​Yemen’s Houthis lingered.