The Bank of Japan (BOJ) has raised its benchmark policy rate from 0.75% to 1%, marking its highest level since 1995. This decision reflects a broader global shift as central banks react to rising inflation and surging energy costs led by geopolitical tensions, specifically the US-Israel conflict with Iran.

As a heavy importer of Middle Eastern oil and gas, Japan has felt the brunt of soaring commodity prices. May wholesale prices jumped over 6% year-on-year, the fastest increase in three years. The rate hike aims to bolster the weakening yen, which has faced severe pressure against the US dollar and the euro. After decades of near-zero rates deployed to fight stagnation and a collapsed asset bubble, economists note Japan has entered a steady inflationary upcycle, rendering crisis-era monetary policy obsolete.

While Japan’s overall inflation rate sat at 1.4% in April, still below the BOJ’s 2% target, medium and long-term inflation expectations are rising. The central bank warned of risks that underlying inflation could overshoot its targets if left unchecked. However, government subsidies easing household fuel costs are expected to cushion the economy from sharp downturns.

The BOJ faces a delicate balancing act: curbing inflation versus inflating borrowing costs for a heavily indebted government and local businesses. Interestingly, the hike occurred while BOJ Governor Kazuo Ueda was hospitalized, though he and other policymakers have increasingly expressed support for normalization.

Despite the hike, Japan’s 1% rate remains historically low compared to Western peers like the US and UK, where interest rates sit comfortably above 3%.

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Source: https://www.bbc.com/news/articles/cjdgl213dpzo