Bank of Japan lifts rate to 1%, highest since 1995, as energy shock feeds through to prices
The Bank of Japan raised its benchmark short-term rate by a quarter point to 1% on Tuesday, taking borrowing costs to levels last seen in 1995 as the central bank moves to contain price pressures from the Iran war's energy shock.
The decision
The Bank of Japan's policy board voted 7-1 to lift the uncollateralized overnight call rate from 0.75% to 1%, the first increase since December and the highest since September 1995. Governor Kazuo Ueda missed the meeting and did not vote; he is in hospital receiving treatment for an infected liver cyst. Deputy Governor Shinichi Uchida was set to hold the post-meeting news conference in his place.
The price pass-through stemming from rising crude oil prices has been progressing at a relatively fast pace in business-to-business transactions, which could spread to an increase in consumer prices across a wide range of items.
The board had kept policy steady at its previous three meetings but revised up price forecasts sharply in April, when three of nine members already proposed a hike to 1%. Markets had since priced in a June move almost fully, and a Reuters poll shows economists expect a further rise to 1.25% in the fourth quarter.
The inflation backdrop
Wholesale inflation hit a three-year high of 6.3% in May, a sign that companies are already passing on higher energy costs. Core consumer inflation is expected to accelerate back above the BOJ's 2% target later this year after dipping below it on government utility-bill subsidies. The central bank's statement warned that medium- and long-term inflation expectations have continued to rise, creating a risk of underlying inflation overshooting its target.
The Middle East conflict has complicated the policy path by adding inflationary pressure through oil costs while hurting an economy that imports nearly all its fuel. A US-Iran peace deal eased some global fears, but the energy shock had already worked its way through supply chains.
Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target.
Currency and market reaction
The weak yen, trading around 160 to the US dollar, has amplified import-price pressures and was one of the factors the BOJ cited for the hike. Low rates had been a drag on the currency for months. Before the decision, Tokyo's Nikkei 225 briefly topped 70,000 in early trading before retreating from those gains.
Bond-purchase plans
The BOJ also decided to stop reducing its Japanese government bond purchases next April, setting a monthly purchase amount of roughly 2 trillion yen to avoid destabilising the JGB market. The move separates the rate-normalisation path from balance-sheet management, giving markets a clearer timeline for both.
- Previous rate hike to 0.75% — last increase before June 2026 move
- April meeting: BOJ holds steady but sharply revises up price forecasts; three members propose hike to 1%
- June meeting: BOJ raises rate to 1% by 7-1 vote; Governor Ueda absent; first hike since December
- Reuters poll projects further rise to 1.25% in the fourth quarter
What comes next
All eyes are on Deputy Governor Uchida's briefing for any hints on the pace and timing of future hikes. The BOJ now aligns with other central banks shifting toward tighter policy, including the European Central Bank. With Governor Ueda absent for at least two weeks, the board's communication strategy will be tested as markets price in further tightening through year-end.
