Japan raises interest rates to 31-year high to curb impact of rising prices

Japan’s central bank has increased interest rates to a fresh 31-year high as it attempts to combat high global inflation linked to the war in Iran.

The Bank of Japan voted to raise its target interest rate from 1% to 1.25%, the highest level since 1995.

The move meant the BoJ joined the US Federal Reserve and the European Central Bank in tightening monetary policy this month, as central banks attempt to curb the impact of rising prices, linked to the conflict in the Middle East.

The Bank of England on Thursday voted to leave UK interest rates on hold at 3.75% but warned they could soon rise amid the fallout from the Iran war.

The BoJ has been raising rates since 2024, when it lifted its base rate out of negative territory. It has been under pressure to raise borrowing costs as the yen weakened steadily against the dollar this year, to levels that prompted policymakers to intervene to stabilise the currency. The Japanese currency weakened about 0.7% against the dollar on Friday.

The vote to raise rates was not unanimous – with two board members dissenting to the increase.

“The tone of the statement, along with two dissenters for the decision to raise rates, leaves lingering doubts that Japan’s central bank will be cautious in tightening monetary policy further,” ⁠Fred Neumann, the chief Asia economist at HSBC, said.

“While back-to-back hikes appear unlikely, investors will look for clues as to whether officials are prepared to raise interest rates again in December.”

The drop in ​the yen helped the Nikkei stock market index to rise nearly 2%, while the Japanese two-year government ‌bond yields, which are most sensitive to ‌monetary policy expectations, fell four basis points to 1.82%.

European stock futures slipped 0.35%, indicating a lower open.

Prashant Newnaha, a senior rates strategist at TD Securities, said the BOJ reiterated its concerns that underlying inflation could deviate upwards from its 2% target, but “we don’t see a smoking gun supporting a back-to-back hike ‌in October”.

He said: “We stick with our call for rate hikes roughly every quarter with the next 25 basis points hike in December.”

Hopes of ​alternative ways for oil supply from the Middle East to ​reach markets pushed Brent crude futures down as much as 1.5% to $103.29 a barrel even as concerns about strikes between Saudi Arabia and ​Yemen’s Houthis lingered.