Bank of Japan Raises Key Interest Rate to 1% for First Time Since 1995

The Bank of Japan raised its key interest rate to 1% on Tuesday, the highest level in more than three decades. This move aligns with economists' expectations gathered by Reuters and accelerates the monetary policy normalization that began in 2024.

This is the first interest rate hike by the Bank of Japan since December, when it increased the rate to the current 0.75%. The tightening of monetary policy comes as Japan faces a weakening yen and gradually rising inflation, partly attributed to the ongoing war with Iran.

In a note issued before the decision, Frederic Neumann, HSBC's chief Asian economist, highlighted that Bank of Japan Governor Kazuo Ueda had indicated this increase in a speech earlier in the month. Ueda stated that "the side effects of inflation caused by rising crude oil prices are likely to lead to higher core inflation."

Impact of Yen Weakness on Interest Rate Decision

The depreciation of the Japanese yen contributed to the decision to raise interest rates. Japan spent approximately $73.5 billion on market interventions in May, yet the yen continued to weaken, approaching the 160 level against the US dollar and remaining around that level for most of June.

Jasper Cole, head of experts at Tokyo-based Monex Group, told CNBC that "intervening without changing domestic monetary policy is like pressing the brakes while keeping your foot on the accelerator; at best, your passengers enjoy a brief ride, at worst, your brakes wear out."

Although a weaker yen supports the competitiveness of Japanese exports, it also increases imported inflation and pressures public finances. The government, led by Prime Minister Sanae Takaichi, approved a supplementary budget of 3 trillion yen to shield households from rising energy costs, following the annual budget passed months earlier.

Japan's Economic and Strategic Initiatives

On Sunday, the United Kingdom and Japan signed a broad partnership in economic and technological fields, expected to generate investments exceeding £18 billion ($24 billion). This agreement coincided with Prime Minister Sanae Takaichi's visit to London.

Additionally, Japan is preparing to send a delegation to Greenland this summer to assess opportunities for extracting rare earth minerals, according to a report by the Japanese news agency Nikkei on Sunday.

Recent Inflation Trends in Japan

Japan's core inflation rate declined more than expected in April to 1.4%, marking its lowest level since March 2022. The overall inflation rate also stood at 1.4%, representing the fourth consecutive month below the Bank of Japan's 2% target.