The Bank of Japan raised its benchmark interest rate to 1.0% on Tuesday, the highest level in 31 years, judging that inflation stoked by costlier energy now poses a greater risk than the danger of choking off a fragile recovery. The quarter-point increase, from 0.75%, lifts borrowing costs to a level last seen in 1995 and marks the bank's first move since December.
The decision was not unanimous. The nine-member policy board split 7-1, with Toichiro Asada dissenting in favour of holding rates steady. In an unusual circumstance for the modern BOJ, Governor Kazuo Ueda was absent from the two-day meeting, hospitalized with an infected liver cyst, leaving Deputy Governor Ryozo Himino to preside over the vote.
In its statement, the bank said "price pass-through stemming from the rise in crude oil prices has been progressing at a relatively fast pace" and warned that "medium- to long-term inflation expectations have also continued to rise." Officials flagged the risk that underlying consumer inflation could settle above their 2% target, the threshold they have spent years trying to durably reach after decades of deflation and ultra-loose policy.
The move had been widely expected; economists polled by Reuters had forecast the increase. Even so, it lands at a delicate political moment. Prime Minister Sanae Takaichi, who took office last October, built her economic strategy around a weak yen and accommodative monetary settings to support exporters and growth, and her government has pressed the bank not to brake the economy with higher borrowing costs.
That tension has simmered for weeks. Takaichi met BOJ leadership after her election win, and markets have parsed every signal for whether the bank would defer to the government or assert its independence. Tuesday's hike, and language hinting that further increases could come, suggests policymakers are willing to move ahead of political pressure when inflation data demand it.
Much of the recent price pressure traces to the Middle East conflict, which drove crude sharply higher before the United States and Iran agreed to halt their war and reopen the Strait of Hormuz. Oil has since retreated to a two-month low, but the earlier spike has continued to feed through to Japanese consumer prices, complicating the bank's read on how much of the inflation is temporary.
For households and businesses, the change nudges up the cost of mortgages and corporate loans after a long era of near-zero rates. For global markets, a steadily tightening BOJ matters well beyond Japan: Japanese institutions hold vast sums of foreign bonds, and higher domestic yields can pull that money home, tightening financial conditions abroad.