The Bank of Japan raised interest rates to their highest level in 31 years on Tuesday, marking a significant step in the normalization of monetary policy and signaling its willingness to tighten further as it seeks to contain inflationary pressures driven by the Iran war’s impact on energy prices.
In a widely anticipated decision, the Bank of Japan raised its short-term policy rate to 1 percent from 0.75 percent, pushing borrowing costs to their highest level since 1995. The move was approved by a 7-1 majority, with board member Toichiro Asada voting against the increase. Asada, who was appointed by Prime Minister Sanae Takaichi, is regarded as one of the more dovish members of the policy board.
Bank of Japan signals preparedness to continue raising interest rates
The increase, the first since December 2025, brings the Bank of Japan in line with other major central banks adopting a more restrictive stance to curb inflation, including the European Central Bank.
Deputy Governor Shinichi Uchida signaled that the Bank of Japan is prepared to continue raising interest rates, citing concerns that inflation could exceed its 2 percent target even as economic risks linked to the Iran war begin to ease.
While describing the recent U.S.-Iran peace agreement as a positive development, Uchida said inflationary pressures remain elevated as companies increasingly pass higher costs on to consumers and continue raising wages.
The Bank of Japan also announced that it will pause the reduction of its bond-buying program from April next year, maintaining purchases of around 2 trillion yen ($12.5 billion) in Japanese government bonds each month.
The central bank said it would discontinue its annual review of the bond-tapering plan, while retaining the flexibility to adjust the pace of bond purchases at future policy meetings if economic or market conditions warrant such changes.
Bank of Japan continues to monitor yen
While offering little indication of when the next rate hike might come, Uchida said the Bank of Japan remains focused on upside inflation risks, with underlying price growth already nearing the central bank’s 2 percent target.
Uchida also said policymakers are closely monitoring movements in the yen, noting that Japanese companies are now passing higher import costs on to consumers more quickly than in the past, increasing the risk of sustained inflationary pressures.
Five major central banks convene this week, with the Bank of Japan (BoJ) decision widely priced in. This week, Kevin Warsh makes his debut as the Federal Reserve Chair, with the policy rate widely expected to hold at 3.75 percent. Market attention is centered on whether Warsh signals independence from the White House and provides direction on the second-half rate path, where markets currently price a 60 percent probability of a hike.
The Reserve Bank of Australia (RBA) and Bank of England (BoE) are also set to hold, with Australia’s labor market and growth momentum having softened following three consecutive hikes earlier this year, and UK services inflation easing — potentially reflecting weakening consumer demand.
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