Bank of Japan raises rates to 1% as energy prices surge

Japan's central bank has raised its main interest rate to 1%, the highest level since 1995, after a surge in global energy prices. The Bank of Japan said on Tuesday that it was increasing its policy rate from 0.75% as it responds to inflation pressures linked to higher oil and gas costs. The move comes as Japan continues to balance efforts to contain prices with the risk of making borrowing more expensive for households, businesses and the government.

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The decision marks another step in a gradual tightening cycle that began in March 2024, when the bank delivered its first rate rise in 17 years. Japan had kept rates near zero for two decades after the collapse of asset prices in the 1990s, as the economy struggled with deflation and weak growth. The latest increase follows a period in which some other central banks have also raised rates this year, with higher energy costs adding to inflation pressures in countries that rely heavily on imported fuel.

The Bank of Japan has been under pressure to cool inflation, which had been extremely low in the country until relatively recently. Wholesale prices in Japan rose by more than 6% in May from a year earlier, the fastest pace in three years, while overall inflation stood at 1.4% in April, still below the bank's 2% target. Governor Kazuo Ueda was absent from this week's meeting because he was in hospital being treated for an infected liver cyst, but he has recently signalled a more positive stance on further rate rises.

The move matters because Japan is one of the world's largest economies and a major importer of energy. Higher global energy prices have fed through into domestic costs, adding to pressure on policymakers to act even though inflation remains below target. The decision also has implications for government borrowing costs and for companies that have benefited from years of ultra-low interest rates.

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It comes at a time when central banks globally are still weighing how far to go in tightening policy without slowing growth too sharply. The BOJ's approach has changed gradually after years of emergency-style monetary policy. Interest rates were cut aggressively in the 1990s after the collapse of property and share prices, and remained near zero for much of the following two decades.

The bank has now been moving away from that stance as it judges that Japan is in an inflationary upcycle rather than a deflationary one. Jesper Koll, a Japan economist, said the country no longer needed emergency monetary policy and that the BOJ wanted to return to a more normal approach. What remains unclear is how far the bank will go from here and how quickly it will move.

Policymakers have said they will weigh upside risks to prices against downside risks to economic activity, and that trade-off is likely to remain central in coming meetings. Investors will also be watching for any further signals from Governor Ueda and for the impact of higher rates on borrowing, spending and inflation in the months ahead.

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