Japan raises interest rates to highest level since 1995

2026-06-16 08:41:00, Kosova & Bota CNA

Japan's central bank has raised its key interest rate to a new record high in 31 years, following a surge in global energy prices.

On Tuesday, the Bank of Japan (BOJ) raised its so-called interest rate to 1% from 0.75% - a level not seen since 1995.

The decision comes at a time when several other central banks have raised interest rates this year, while the war in Iran has raised the cost of living.

Interest rates in Japan were cut aggressively in the 1990s to combat the fallout from falling asset prices such as property and shares. They had been near zero for two decades as prices fell and growth stagnated.

The bank has been gradually raising interest rates since March 2024 - at the time it was the country's first increase in 17 years.

"After twenty years of deflation, Japan is now in a cycle of rising inflation," Japanese economist Jesper Koll told the BBC.

"Emergency/crisis management monetary policy is no longer necessary and the Bank of Japan wants to return to normal monetary policy," he added.

The Bank of Japan has been under pressure to bring down inflation, which was extremely low in the country until relatively recently.

Higher energy prices have fueled inflation, adding pressure on countries like Japan that depend heavily on oil and gas from the Middle East.

Wholesale prices in Japan rose more than 6% in May from a year earlier, rising at the fastest pace in three years.

But the country's overall inflation rate, which was 1.4% in April, is currently below the Bank of Japan's 2% target.

The risk of a significant deterioration in Japan's economy due to the war in Iran is less likely due to government measures, including easing the impact on households from high fuel costs, the bank said on Tuesday.

But he added: “Given that medium- and longer-term inflation expectations have also continued to rise, there is a risk that core inflation could deviate above our price target.”

The Bank of Japan faces a tricky trade-off: Raising interest rates can help reduce inflation, but higher rates also make borrowing more costly, increasing spending for the government and businesses.

Bank Governor Kazuo Ueda - a central figure in setting interest rates - missed this week's meeting due to hospitalization, where he is being treated for an infected liver cyst.

But, along with other Bank of Japan policymakers, he has expressed an increasingly positive stance toward raising interest rates in recent months.
“Even if the situation remains unclear, if it is judged that the upside risks to prices outweigh the downside risks to economic activity, it will be necessary to fully discuss the pros and cons of raising the monetary policy interest rate,” Ueda said earlier this month.

Prime Minister Sanae Takaichi, known for her support for increasing domestic spending, has previously rejected the idea of ??raising interest rates, although she is under pressure to reduce inflation in Japan.

However, she has not publicly criticized the Bank of Japan's push for higher interest rates since taking office last year.

The latest interest rate hike is the second since Takaichi took office and had been expected since the BOJ raised its policy rate to "around 0.75%" in December.

The decision to raise interest rates also comes at a time when the bank aims to stabilize the yen, which is under pressure from other major currencies such as the US dollar and the euro.

"There has been a feeling that the yen is very cheap and that its currency appreciation will not hurt," said Ulrike Schaede, a business professor at the University of California, San Diego.

Even with the growth, Japan's interest rate remains low compared to other major economies.

For example, the US and the UK currently have interest rates above 3%, although both central banks are expected to keep their rates unchanged when they meet this week.