News Summary
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- Japan’s central bank raised the policy interest rate by 25 basis points to 1.25%, signaling further hikes ahead.
- The Bank of Japan’s decision was passed by a 7–2 majority, marking the highest interest rate level in over 30 years.
- Japan’s core inflation slightly decreased from 1.8% to 1.7% in August, but rising energy costs continue to exert inflationary pressure.
October 2, Tokyo (RASS/AFP) — Japan’s central bank on Friday raised interest rates to the highest level in over 30 years, citing inflationary pressures from rising energy prices and a weakened yen, while signaling further rate hikes to contain inflation.
The move met market expectations as the bank raised its policy rate by 25 basis points to 1.25 percent.
This decision follows recent stringent monetary policies by the European Central Bank and the U.S. Federal Reserve. However, the vote was not unanimous, with the decision passing by a 7–2 majority.
Authorities felt compelled to raise rates due to continued inflationary pressure from middle eastern conflicts that have pushed oil prices higher. This situation shows no immediate signs of abating, and the pressure is ongoing.
“Core CPI inflation is approaching 2 percent, and with financial conditions easing, the Bank will continue to raise the policy interest rate,” the Bank of Japan stated on its website.
Central bank officials are closely monitoring yen movements. The yen depreciated to a 40-year low against the dollar in July, which prompted historic joint intervention by U.S. and Japanese authorities in foreign exchange markets.
The large interest rate gap between Japan’s ultra-low rates and the Federal Reserve has attracted investors to dollar-denominated assets offering better returns.
This rate hike, the highest since 1995, had been anticipated for weeks but was followed by a further depreciation of the yen, which fell past 157 per dollar from about 156.30 before the announcement.
“The bank seemed to be seeking evidence to narrow the gap between hikes, but those disagreements were significant,” said Stephen Innes of QuinteX Intel.
“Traders were looking for any signs the bank could move faster now, but two members argued the move today was already too early.”
The weaker yen increases the cost of imported goods, adding to inflationary pressures.
Data released Friday showed core inflation dipped slightly from 1.8% to 1.7% in August but remains close to the bank’s 2% target.
The Ministry of Internal Affairs’ study excluded volatile fresh food prices, which fell more than expected by companies’ forecasts.
Government subsidies for petrol and electricity have helped slow inflation, statistics showed.
But this relief could be short-lived as energy and gas prices have surged due to Middle Eastern tensions in recent weeks.
“Although there was a slight change in inflation in August, rising energy costs suggest inflation will soon exceed the bank’s 2% target,” said Marcel Thillient at Capital Economics.
The government is trying to mitigate inflation’s impact on household purchasing power with large stimulus packages, broad energy tax cuts, and consumption support measures enacted last spring that will last through the end of 2025. Additionally, Tokyo announced this week a significant reduction in consumption tax on food products from 8% to 1% for two years, effective April 2027.
