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

The Bank of Japan has raised its main interest rate to a record high of 1.25%, marking a new 31-year peak. This move comes despite Japan's long-standing tradition of low borrowing costs and as the country grapples with rising economic pressures. The hike, announced on Friday, follows a series of similar increases over the past two and a half years. The Bank of Japan increased the rate from 1% to the current level in a move widely anticipated by market observers.

This decision is part of a broader trend as central banks worldwide adjust rates in response to surging energy prices stemming from the Iran conflict. The United States Federal Reserve raised its benchmark rate for the first time in over three years, while the European Central Bank increased borrowing costs earlier this month. The Bank of Japan has been gradually raising rates since 2024, when they were at a record low of minus 0.1%.

Japan faces several economic challenges, including a weak yen, rising prices, and a shrinking labor force. Official data released ahead of the BOJ announcement indicated that inflation eased slightly last month, with core inflation falling to 1.7% in August from 1.8% in the previous month. However, inflation remains near the bank's 2% target level.

While Japan's inflation rate is not particularly high by global standards, the recent rise in prices represents a significant shift for the economy. Until recently, Japan experienced very low inflation or even deflation for more than three decades. The country's vulnerability to global oil and gas price fluctuations is heightened due to its heavy reliance on Middle Eastern energy supplies.

In a notable intervention, Tokyo and Washington jointly stepped in to prevent the yen from further weakening after it hit a 40-year low in August. This coordinated effort was the first of its kind since 2011, when both nations acted together to support the yen following a major earthquake and tsunami in eastern Japan. US Treasury Secretary Scott Bessent has been urging the Bank of Japan to raise interest rates to aid the yen, following the government's intervention.