The Bank of Japan (BOJ) has raised its benchmark interest rate to 1.25%, taking borrowing costs to their highest level in 31 years as the central bank steps up efforts to contain inflation. 

The 25-basis-point hike was widely expected and marks another step away from Japan’s long period of ultra-low interest rates. The decision came as Japan continues to face pressure from higher energy costs, a weak yen and rising import prices. 

The BOJ raised the rate from 1%, with the decision passing by a 7-2 vote. Two policymakers opposed the increase, highlighting differences within the central bank over how quickly monetary policy should tighten.

Japan’s latest inflation data also supported the case for tighter monetary policy. Core consumer inflation eased slightly to 1.7% in August from 1.8% in July, but a measure that excludes both fresh food and fuel rose 1.9%. The BOJ has warned that higher energy costs and a weaker yen could push inflation above its 2% target.

Energy prices have become an important concern for Japan because the country depends heavily on imports. Disruptions linked to the conflict in the Middle East have pushed up fuel costs, while the weak yen has made imported goods and raw materials more expensive. Japan’s producer prices also remained elevated, with wholesale inflation rising 7.6% year-on-year in August.

The rate hike also comes amid a broader global shift towards tighter monetary policy. The US Federal Reserve recently raised its benchmark rate to 3.75%-4%, while other major central banks are also dealing with persistent inflation and higher energy costs.

However, the BOJ’s move did not immediately strengthen the yen. The currency weakened after the decision as investors focused on the two dissenting votes and the lack of firm guidance on the timing of future hikes. The dollar rose to around 157.84 yen.

The BOJ has now moved a long way from its negative-rate policy of 2024. Governor Kazuo Ueda indicated that the central bank remains prepared to respond if inflation risks increase, keeping future rate decisions dependent on economic and price data.

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