For the sixth time in two and a half years, Japan's central bank has raised its benchmark interest rate — now at 1.25 percent, a level unseen since 1995 — continuing its quiet departure from decades of near-zero borrowing costs. The decision reflects a world reshaped by energy disruptions, where central banks from Tokyo to Washington to Frankfurt are all tightening in unison, each responding to the same inflationary pressures flowing through global supply chains. Japan, long defined by deflation and monetary stillness, is now navigating a more turbulent economic current — one that has already
Japan Raises Interest Rate to 31-Year High Amid Global Inflation Push
Six rate increases over two and a half years may sound modest
Mark
Why does Japan raising rates to 1.25 percent matter to anyone outside Japan?
Mimi
Because Japan is the world's third-largest economy, and when it shifts monetary policy, it affects currency markets, trade, and global financial conditions. The yen's strength or weakness ripples through supply chains everywhere.
Luke
But 1.25 percent is still historically low. Are we really talking about a major policy shift, or is this just Japan catching up to where other countries already are?
Mark
You mentioned the yen weakened to a 40-year low. Why would that happen if the Bank of Japan was already raising rates?
Mimi
Rate increases take time to work through markets. The yen had been falling for months before the August intervention. The rate hikes started in 2024, but currency movements depend on many factors—expectations about future rates, relative returns in other countries, broader economic sentiment.
Luke
So the intervention in August was essentially saying the market wasn't responding to the rate increases fast enough. That's a sign the Bank of Japan's policy tools might be limited.
Mark
The source mentions the Iran war causing energy price spikes. How confident are we that's the main driver of inflation globally?
Mimi
The disruptions to the Strait of Hormuz are documented and real. Oil and gas prices did rise this year. But inflation is always multicausal—supply chains, labor markets, monetary policy itself all play roles.
Luke
Right. The source attributes the energy price rise to the Iran war, but it doesn't quantify how much of the global inflation spike comes from that versus other factors. We know energy prices went up; we don't know from this reporting how much of the inflation problem that explains.
Mark
Japan had deflation for thirty years. Is this inflation now a problem or a correction?
Mimi
That's the real question. Deflation is economically damaging—it discourages spending and investment. Some inflation can be healthy. But the Bank of Japan is trying to reach a level similar to other major economies, which suggests they're aiming for stability, not fighting a crisis.
Luke
The core inflation figure is 1.7 percent, close to their 2 percent target. By that measure, they're almost there. So why keep raising rates? The source doesn't explain the Bank of Japan's own reasoning about how much higher they plan to go.
Il Polso
- Energy price shocks from Middle East disruptions are forcing central banks worldwide into synchronized tightening, leaving little room for any economy to stand apart.
- Japan's shift is especially striking — a country that spent three decades fighting deflation is now raising rates for the sixth time, fundamentally rewiring expectations for borrowers, investors, and policymakers alike.
- The yen's slide to a 40-year low earlier this year exposed the fragility beneath the surface, triggering the first US-Japan joint currency intervention since the 2011 disaster — a signal that markets are watching every move closely.
- Core inflation has eased slightly to 1.7 percent, suggesting the Bank of Japan's gradual approach may be working, but the central bank remains just below its 2 percent target with no clear endpoint in sight.
- Both Tokyo and Washington have warned they stand ready to intervene in currency markets again, leaving the yen's stability as an open and unresolved question even as rate normalization continues.
For the sixth time in two and a half years, Japan's central bank has raised its benchmark interest rate — now at 1.25 percent, a level unseen since 1995 — continuing its quiet departure from decades of near-zero borrowing costs. The decision reflects a world reshaped by energy disruptions, where central banks from Tokyo to Washington to Frankfurt are all tightening in unison, each responding to the same inflationary pressures flowing through global supply chains. Japan, long defined by deflation and monetary stillness, is now navigating a more turbulent economic current — one that has already tested its currency and drawn it into rare coordinated action with the United States.
Japan's central bank raised its benchmark interest rate to 1.25 percent on Friday — the highest level since 1995 — marking the sixth increase in two and a half years. The move continues a slow but significant unwinding of the ultra-low borrowing costs that defined Japan's economy for decades, beginning from a starting point of minus 0.1 percent in 2024. For a country long accustomed to near-zero rates, the shift is less a technical adjustment than a fundamental change in economic identity.
The Bank of Japan did not act alone. The U.S. Federal Reserve had raised rates just days earlier — its first hike in over three years — while the European Central Bank had already tightened earlier in September. The shared catalyst was energy: prices rising sharply due to disruptions around the Strait of Hormuz, a vital corridor for global oil and gas. Japan, heavily dependent on Middle Eastern energy imports, is especially exposed to such shocks.
Inflation data released the same day offered a measure of reassurance. Core inflation eased slightly to 1.7 percent in August, remaining close to the Bank of Japan's 2 percent target and suggesting its earlier moves were beginning to take hold. The figure may seem modest globally, but for Japan — which endured roughly three decades of deflation — any sustained price growth represents a profound departure from recent history.
The currency question adds another layer of complexity. Higher interest rates typically strengthen a nation's currency, yet the yen had fallen to a 40-year low in recent months. In August, Japan's Ministry of Finance and the U.S. Treasury coordinated a rare joint intervention to arrest the slide — the first such action between the two countries since 2011. Both governments have signaled they remain prepared to act again, leaving the yen's trajectory as an unresolved thread even as Japan continues its careful march toward monetary normalcy.
Japan's central bank took another step away from the ultra-low interest rates that have defined its economy for decades, raising its benchmark rate to 1.25 percent on Friday. The move brought the rate to its highest level since 1995, continuing a gradual normalization that began in 2024 when rates sat at minus 0.1 percent. Six rate increases over two and a half years may sound modest, but for an economy accustomed to near-zero borrowing costs, the shift represents a fundamental recalibration.
The Bank of Japan's decision came as central banks worldwide moved in the same direction. The U.S. Federal Reserve had raised its benchmark rate just days earlier—the first increase in over three years—while the European Central Bank had already tightened policy earlier in the month. The common driver was the same across all these economies: energy prices climbing sharply due to disruptions in the Middle East, particularly around the Strait of Hormuz, a critical shipping corridor for global oil and gas. Those rising energy costs were feeding into inflation, pushing central banks to act.
Japan faces particular vulnerability to Middle Eastern supply shocks because it depends heavily on energy imports from that region. The timing of the rate increase coincided with official inflation data released the same day, showing core inflation had eased slightly to 1.7 percent in August from 1.8 percent the month before. The figure remained close to the Bank of Japan's two percent target, suggesting the central bank's earlier moves were having some effect. For context, Japan's inflation rate would be considered modest by global standards, but the country's recent experience with rising prices marks a departure from roughly three decades of very low inflation or outright deflation—a period when prices actually fell.
When central banks raise interest rates, the effect typically ripples through currency markets. Higher rates make a country's currency more attractive to investors and traders, strengthening its value. Yet Japan had faced the opposite problem in recent months. The yen had weakened to a 40-year low, prompting an unusual intervention in August. Japan's Ministry of Finance and the U.S. Treasury, led by Secretary Scott Bessent, coordinated action to halt the currency's slide—the first joint intervention between the two countries since 2011, when they worked together to weaken the yen following the earthquake and tsunami that devastated eastern Japan. Both governments signaled they would not hesitate to intervene again if needed, suggesting the currency question remains unsettled even as the Bank of Japan continues its measured path toward more conventional interest rates.
Citazioni salienti
Both Japan's Ministry of Finance and U.S. Treasury Secretary Scott Bessent said they would not hesitate to conduct more joint interventions in the future— Japanese Ministry of Finance and U.S. Treasury
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Economy & Finance