Bank of Japan Raises Policy Rate to 1.25%, Highest in Over 30 Years

The Bank of Japan increased its benchmark interest rate by 25 basis points on Friday, in a move that had been widely anticipated, and indicated it stands ready to pursue further tightening if needed.

The Japanese central bank joined other major central banks in confronting rising inflation, which is being driven largely by escalating energy costs.

BOJ policymakers voted 7 to 2 in favor of lifting the policy rate from 1.00% to 1.25%, marking the highest level in more than three decades and signaling a decisive shift away from the ultra‑low rates that had long kept the yen a low‑cost funding currency.

At a press conference following the meeting, Governor Kazuo Ueda said the bank’s policy focus had changed as underlying inflation nears 2%. He noted that economic and price developments remain consistent with the BOJ’s baseline forecast, but warned of an increasing risk that inflation could overshoot the target, potentially harming the economy.

Accordingly, the central bank’s primary objective will be to stabilize underlying inflation at the 2% level.

Nevertheless, the yen did not rally following the decision and instead weakened against major peers, as investors cited the absence of explicitly hawkish guidance and the split vote, with two dovish members favoring a more cautious approach to raising borrowing costs.

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