Bank of Japan lifts rate to 1%, ending another layer of ultra-cheap money

The Bank of Japan raised its short-term policy rate from 0.75% to 1% at a two-day meeting that ended Tuesday, according to UPI, citing the Yomiuri Shimbun. The rate is Japan’s highest since 1995 and marks another step away from decades of ultra-low borrowing costs.

Associated Press reported that the central bank cited inflation as it lifted the key interest rate to a three-decade high. UPI said the move was approved by a 7-1 vote, with Bank of Japan Gov. Kazuo Ueda absent from the meeting because he was hospitalized for medical treatment.

TheStreet Pro reported that the Bank of Japan lifted the base rate by 25 basis points to around 1.0%, its fifth hike since it exited negative rates in March 2024. The outlet said rates were last this high in August 1995, when they were falling from the 6.0% rate imposed during Japan’s asset-bubble period.

The central bank’s reasoning runs through prices, wages and imported energy. UPI reported that the BOJ said rising oil prices linked to tensions in the Middle East could weigh on growth while adding inflationary pressure as companies pass higher costs to customers. The bank said reducing monetary accommodation was needed to achieve its 2% inflation target in a sustainable and stable way.

TheStreet Pro reported that the BOJ was encouraged by high corporate profits and improvement in jobs and income, while noting that Japan’s economy remains pressured by higher crude oil prices in a country that imports all of its oil. It also said government measures, including energy subsidies and a cap on fuel prices at ¥170 per liter, helped reduce the risk of a significant slowdown.

The effects inside Japan are expected to split across households and businesses. UPI reported that the higher rate is expected to benefit older households with substantial savings while increasing pressure on younger mortgage borrowers and debt-dependent small businesses. The country’s major banks, MUFG Bank, Sumitomo Mitsui Banking Corp. and Mizuho Bank, said they would raise rates following the decision, according to UPI’s excerpt.

The rate move also reaches beyond Japan. UPI reported that South Korean companies operating in Japan could be affected through exchange rates, financing costs and changes in Japanese consumer demand. Cointribune framed the wider market risk through the yen carry trade, in which investors borrow cheap yen to buy higher-yielding assets abroad; when Japanese rates rise, those positions can unwind and pressure risk assets.

Cointribune reported that the BOJ also confirmed plans to reduce government bond purchases by 200 billion yen per quarter until early 2027, about $1.3 billion. That adds a second channel of policy normalization: not only a higher short-term rate, but a smaller central-bank presence in bond buying over time.

What remains uncertain is how far Japan can continue tightening without slowing growth or amplifying stress in markets built around cheap yen funding. The supplied reporting shows a central bank responding to inflation pressure and a weaker yen, but it does not establish the next rate path or quantify the full global exposure to yen-funded trades.

The 1% rate is small compared with many economies, but large in Japan’s own monetary history. After years when Japanese money helped anchor global borrowing conditions, the country’s normalization is now moving through savers, mortgage holders, banks, exporters, importers, foreign companies and investors who treated low yen funding as a stable part of the financial landscape.