Bank of Japan hikes rates to 30-year high, signals more hikes; All you need to know

The Bank of Japan raised interest rates on Friday to levels last seen three decades ago in a widely anticipated move that could rattle world markets.

The central bank ended a two-day policy meeting by raising its benchmark short-term interest rate by 25 basis points to 0.75%, the highest since September 1995, when Japan was grappling with the collapse of an asset-price bubble.

In a statement, the BOJ said the decision was unanimous and reiterated that it would continue raising rates if its economic and inflation outlooks materialise.

The move underscored policymakers’ growing confidence that Japan is on track to sustainably achieve its 2% inflation target.

“Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained,” the BOJ said in explaining the rate hike.

“Given that real interest rates are at significantly low levels, the BOJ will continue to raise interest rates” if its forecasts for economic activity and prices are realised, it added.

The yen weakened more than 0.3% to 156.02 per dollar following the announcement, which markets had largely priced in. The benchmark 10-year Japanese government bond yield rose 3.5 basis points to 2.0%, its highest level since May 2006.

Inflation outlook

The BOJ maintained its view that underlying inflation will converge around its 2% target in the latter half of its three-year projection period through fiscal 2027.

Japan’s central bank has kept borrowing costs extremely low since the early 1990s, when the collapse of an asset-price bubble ushered in years of weak growth and deflation.

Ultra-low rates also helped the government service its massive public debt, which is nearly three times the size of the economy.

As Japan’s population aged and shrank, sluggish demand led to persistent deflation, while investment remained subdued despite cheap credit.

In 2013, the BOJ launched an aggressive stimulus programme that included massive bond purchases and near-zero interest rates to boost growth and inflation.

When the COVID-19 pandemic struck, the policy rate stood at minus 0.1%. The BOJ began raising rates only in 2024, its first hike in 17 years, after inflation stabilised above its 2% target.

Global spillover risks

Even modest hike in Japanese rates can have outsized global effects by undermining the so-called carry trade, in which investors borrow cheaply in yen to invest in higher-yielding assets abroad.

The BOJ had earlier delayed rate increases amid uncertainty over the impact of US President Donald Trump’s tariffs on Japanese exporters.