In a significant move to tackle persistent inflation, the Bank of Japan (BoJ) has announced its first interest rate hike since January, pushing borrowing costs to their highest point in three decades.
Unanimous Decision Amid Steady Inflation
The central bank's policy board voted unanimously on Friday to raise the main interest rate from 0.5 percent to 0.75 percent. This marks the highest level since 1995. The decision followed the release of official data showing Japan's core inflation rate held steady at three percent in November, which remains significantly above the BoJ's two percent target.
In a report explaining the move, bank officials stated that "Japan's economy has recovered moderately" and noted that while uncertainties regarding the US economy and global trade policy persist, they have declined. The rate hike, which was widely anticipated by markets, resulted in a slight weakening of the yen against the US dollar.
Inflation Pressures and Government Response
A key driver of the ongoing inflation has been a dramatic surge in the price of rice, a staple food. Government data for November revealed that rice prices jumped by 37 percent compared to the same period last year. This spike is attributed to supply chain disruptions from a very hot summer in 2023 and panic-buying triggered by earthquake warnings.
Prime Minister Sanae Takaichi, who took office in October, has identified fighting inflation as a top priority. Her administration recently secured parliamentary approval for an extra budget worth 18.3 trillion yen ($118 billion) to fund a substantial economic stimulus package. Despite her historical advocacy for loose monetary policy to spur growth, Takaichi has stated that interest rate decisions should be left to the independent central bank.
Economic Context and Global Concerns
The BoJ began its current tightening cycle in March last year, moving away from negative interest rates as signs emerged that the country's long period of economic stagnation was ending. However, it paused hikes at the start of 2025 due to growing worries about the global economic outlook and US trade tariffs.
Recent weeks have also seen yields on Japanese government bonds rise, reflecting market concerns about the new government's budget discipline. Despite the economy contracting by 0.6 percent in the third quarter, BoJ Governor Kazuo Ueda offered a cautiously optimistic note last week, suggesting the impact of US tariffs has been less severe than initially feared, as American corporations have absorbed some of the costs.
This landmark rate increase signals the BoJ's continued focus on normalising monetary policy in the face of sustained inflationary pressures, setting a new course for the world's third-largest economy.
