Japan Raises Interest Rates to 30-Year High as Inflation Pressures Mount

By Blessing Nweke

Japan’s central bank has lifted its main interest rate to the highest level since 1995, marking a historic shift in the country’s monetary policy as households grapple with rising living costs.

In a widely anticipated move on Friday, the Bank of Japan (BOJ) raised its benchmark rate by a quarter of a percentage point to around 0.75%. The decision, taken by the policy board led by Governor Kazuo Ueda, is the first rate hike since January and the first under both Ueda and Prime Minister Sanae Takaichi in their current roles.

The increase reflects mounting concern about inflation, which has been fuelled in part by the yen’s prolonged weakness against major currencies such as the US dollar and the euro. A weaker yen has made imports more expensive, pushing up prices for consumers. By raising interest rates, the BOJ aims to support the currency and help cool inflationary pressures.

However, the move also carries risks. Higher interest rates increase the cost of government borrowing, a sensitive issue for Japan given its heavy public debt. Takaichi has previously criticised the idea of raising rates, calling it “stupid” last year, though she has not publicly opposed the BOJ’s actions since taking office in October. Still, with public support for her Liberal Democratic Party eroded by rising prices, tackling inflation has become a political priority.

Official data released on Friday showed that inflation excluding food and fuel rose by 3% in November, remaining above the BOJ’s 2% target. Some analysts question how effective the rate hike will be. Shoki Omori, chief strategist at Mizuho, said markets had already priced in the move and the yen remains relatively weak.

Most economists expect one further rate rise next year, potentially taking the benchmark rate to 1%. If that happens, it would underscore what analysts describe as a once-in-a-generation shift after nearly three decades of ultra-low interest rates in Japan, even as other major central banks move toward cutting borrowing costs.