Bank of Japan hikes rates to highest since 1995 as yen languishes at historic lows

Japan’s central bank on Tuesday raised its policy rate to the highest in over 30 years at 1%, in line with expectations of economists polled by Reuters, accelerating policy normalization started in 2024.

This is the Bank of Japan’s first hike since December, when it raised rates to its current level of 0.75%, and the first time since 1995 that rates have been raised to 1%.

The BOJ said the decision was split 7-1, with board member Toichiro Asada dissenting and advocating for a hold at 0.75%.

The policy tightening comes at a time when Japan has been struggling with a weak yen and inflation that has started to creep up, partly due to the Iran war.

In a note before the decision, Frederic Neumann, HSBC’s chief Asia economist, said that BOJ Governor Kazuo Ueda had signaled the hike in speech earlier this month, where he said that “spillover effects of inflations stemming from higher crude oil prices are more likely to lead to an upward deviation in underlying inflation.”

Weakness in the Japanese yen also supported the case for a rate hike.

After reportedly splashing out 11.7 trillion yen ($73.5 billion)on intervention operations in May, the yen weakened again, touching the 160 level against the dollar and languishing at that level for most of June.

“Intervention without changing domestic monetary policy is like tapping the brake while keeping your right foot firmly on the accelerator — at best, your passengers have a little fun, at worst, you’re burning through your brake pads,” Jesper Koll, expert director at Tokyo-based financial services firm Monex Group told CNBC.

A weak yen, despite boosting the competitiveness of Japan’s exports, will increase imported inflation and pressure government finances as it seeks to cushion the impact of rising prices via subsides.

Prime Minister Sanae Takaichi’s administration had enacted a supplementary budget of 3 trillion yen to shield households from rising energy costs, months after passing the yearly budget.

Japan’s core inflation eased more than expected in April to 1.4%, its lowest level since March 2022, with headline inflation also at 1.4%, the fourth straight month below the central bank’s 2% target.

However, analysts told CNBC that the low inflation figures is largely the result of various policy measures that have suppressed inflation, including the removal of Japan’s gasoline tax and making high school free for all students.

—This is breaking news, please check back for updates.