BOJ Hikes Rates to 1%, Highest in 31 Years, Signals More Tightening

The Bank of Japan (BOJ) raised its short-term policy interest rate by 0.25 percentage points to 1.00% from 0.75%, as widely expected. The decision was approved by a 7–1 vote, marking Japan’s highest policy rate in 31 years. Governor Kazuo Ueda was absent due to hospitalization and did not participate in the vote.

BOJ said that Japan’s economy is broadly developing in line with its baseline outlook. The central bank noted that the economy has moderately recovered, although some sectors remain weak. It expects economic growth to slow somewhat but continue a moderate expansion.

The BOJ stated that inflation risks have increased, partly because rising oil prices linked to tensions in the Middle East are being passed on to consumers more quickly. The bank said consumer inflation could temporarily move clearly above 2%, and there is a risk that underlying inflation may exceed its target.

According to the BOJ, core inflation is expected to rise gradually and reach a level consistent with its 2% price target between the second half of fiscal 2026 and fiscal 2027. The bank added that wages and prices are continuing to rise together in a moderate and sustainable manner.

The central bank emphasized that financial conditions remain accommodative and real interest rates are still mostly negative. It expects supportive financial conditions to continue even after the latest rate increase, helping economic activity. The BOJ also said it will continue adjusting policy when necessary to achieve its inflation target in a sustainable and stable way.

On bond purchases, the BOJ said it will continue reducing Japanese government bond (JGB) holdings, which are projected to fall by about 36–39% by March 2030 compared with June 2024 levels. However, it will pause further tapering from April 2027, keeping monthly JGB purchases at around ¥2 trillion, while retaining flexibility to increase purchases if long-term yields rise too sharply.

The BOJ also highlighted several risks that require close monitoring. It said developments in the Middle East, future exchange-rate movements, and global AI-related demand could all affect Japan’s economy and inflation outlook. The bank reiterated that future rate decisions will depend on economic activity, prices, financial conditions, and the likelihood of achieving its inflation objective.