Bank of Japan Raises Rates to 1.25% as Inflation Risks Mount
The Bank of Japan raised its policy rate to about 1.25%, its highest since 1995, citing rising inflation risks and yen weakness, with analysts flagging further hikes ahead.
The Bank of Japan raised its policy rate from around 1.0 percent to approximately 1.25 percent at the conclusion of its monetary policy meeting on Friday, marking its second increase in three months and the highest level since 1995.
Market analysts and economists attributed the decision primarily to growing inflation risks, noting that the central bank sees Japan's underlying inflation rate as already close to its 2 percent target.
"I believe that the primary reason is still on the price front," said Ichikawa Masahiro, chief market strategist at Sumitomo Mitsui DS Asset Management. He pointed to the situation in the Middle East, robust demand linked to artificial intelligence, and yen depreciation and currency movements as factors that have clearly increased the risk of inflation exceeding 2 percent.
Beyond inflation, Ichikawa said the yen is likely to face continued depreciation pressure from multiple directions. Instability in the Middle East and rising crude oil prices are driving buying of the U.S. dollar and selling of the yen, he said, adding that market concerns about Japan's fiscal position and its international balance of payments structure, reflected in factors such as the trade deficit, would also weigh on the currency.
Other experts noted that the central bank is keeping a close watch on the yen's weakness and that the pace of tightening could quicken if external risks materialize.
Hideo Kumano, chief economist at the ABC Economic Research Institute in Japan, said the BOJ indicated at its press conference that persistently elevated crude oil prices stemming from the Middle East situation could accelerate the pace of rate hikes, continuing not only through this year but possibly into the first half of next year.
Kumano said the BOJ may maintain a rhythm of one rate hike every three months, raising rates further, and that by around the middle of 2027, Japan's policy rate could reach 2.0 percent.
Analysts added that the pros and cons of the move are yet to be seen.