The Bank of Japan (BOJ) has delivered its latest interest rate hike, pushing its main borrowing cost to 1.25% — the highest level recorded since 1995. The widely expected move, announced Friday, marks the sixth consecutive rate increase from the BOJ since 2024, when the central bank began unwinding three decades of ultra-loose monetary policy from a historic low of minus 0.1%.
This decision aligns Japan with a broader global trend of monetary tightening, as major central banks around the world ramp up interest rates to combat soaring inflation driven by rising energy prices. The recent Iran war has disrupted energy shipments through the critical Strait of Hormuz, pushing up global oil and gas costs. Just this week, the U.S. Federal Reserve raised its benchmark rate for the first time in more than three years, and the European Central Bank implemented its own rate hike earlier this September.
Japan faces a unique set of interconnected economic pressures that have necessitated this policy shift. For nearly 30 years, the country grappled with stagnant growth, persistent deflation, or extremely low inflation, but recent years have brought a reversal of that trend. While the latest official data shows core inflation eased slightly to 1.7% in August from 1.8% in July, remaining just below the BOJ’s 2% target, inflation remains a growing concern for Japanese households.
As a nation heavily dependent on energy imports from the Middle East, Japan is particularly exposed to supply disruptions stemming from the conflict in Iran. Beyond inflation, the country has also struggled with a steep decline in the value of the yen, which hit a 40-year low against the U.S. dollar in August. In response, Japan and the United States launched a coordinated currency intervention to halt the yen’s slide — the first joint intervention of this kind since 2011, when the two countries acted to weaken the yen in the wake of the devastating Tohoku earthquake and tsunami.
U.S. Treasury Secretary Scott Bessent has openly pressured BOJ Governor Kazuo Ueda to continue raising rates to support the yen, stating that Japanese authorities should “do the right thing” to stabilize currency markets. Both Japanese finance officials and the U.S. Treasury have also confirmed they stand ready to conduct additional joint interventions if the yen’s decline continues.
Market analysts note that the end of Japan’s era of ultra-cheap borrowing is a landmark shift for the global economy. “One of the world’s last sources of ultra-cheap money is disappearing,” explained Lale Akoner, market analyst at investment firm eToro. Akoner added that if the yen fails to strengthen despite higher interest rates, persistent inflation pressure could force the BOJ to accelerate monetary tightening faster than markets or the Japanese government currently expect.
Higher interest rates typically attract foreign investors seeking higher returns, which usually strengthens a nation’s currency. As Japan aligns its monetary policy with other major global economies, the central bank’s gradual rate hikes are designed to address domestic economic challenges while bringing Japan into line with global monetary conditions.