Japan raises interest rate to new 31-year high to curb rising prices

The Bank of Japan has lifted its primary interest rate to a record 31-year peak in an effort to tackle surging prices. On Friday, the central bank increased the rate from 1% to 1.25%, a level not seen since 1995. This follows a series of similar hikes by major global central banks responding to surging energy costs due to the ongoing conflict in Iran.

The U.S. Federal Reserve recently raised its rate for the first time in over three years, while the European Central Bank also raised borrowing costs earlier this month. The Bank of Japan has been raising rates since 2024, when it was at a record low of -0.1%. Six rate hikes in just under two and a half years have brought the central bank's rate closer to that of other major economies.

Japan currently grapples with a weak yen, inflation, and a shrinking workforce. Official data released ahead of the BOJ's decision showed that inflation dipped slightly in August, reaching 1.7% from 1.8% in the previous month, though it remains near the bank's 2% target. Although Japan's inflation is not excessively high by international standards, prices are a relatively new issue.

For three decades, the nation experienced minimal inflation or deflation. Presently, Japan is particularly vulnerable to global oil and gas price fluctuations due to its heavy reliance on Middle Eastern energy. The yen has also faced pressure recently. In August, Tokyo and Washington coordinated an intervention to prevent the yen from falling to a 40-year low, marking the first joint intervention since 2011.

The U.S. Treasury Secretary has been urging the BOJ to raise rates to bolster the yen, urging Governor Kazuo Ueda to implement the necessary measures.