Japan raises interest rate to 31-year high

Thursday, 18 June 2026 00:00 - - {{hitsCtrl.values.hits}}

Japan’s central bank has increased its main interest rate to a new 31-year high after a surge in global energy prices.

On Tuesday, the Bank of Japan (BOJ) raised its so-called policy rate to 1% from 0.75% - a level not seen since 1995.

The decision comes as some other central banks have raised interest rates this year as the US-Israel war with Iran pushed up the cost of living.

Japan’s interest rates were cut aggressively in the 1990s to combat the fallout from a collapse in prices of assets like property and shares. They had been near zero for two decades as prices fell and growth stagnated.

The bank has been gradually raising its interest rate since March 2024 - at the time it was the country’s first hike in 17 years.

“After twenty years of deflation, Japan is now in an inflationary upcycle,” Japan economist Jesper Koll told the BBC.

“Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy,” he added.

The BOJ has been under pressure to cool inflation, which was extremely low in the country until relatively recently.

Higher energy prices have fuelled inflation, adding pressure on countries like Japan that depend heavily on oil and gas from the Middle East.

Japan’s wholesale prices climbed by more than 6% in May from a year earlier, rising at the fastest pace in three years.

But the country’s overall inflation rate, which was 1.4% in April, currently sits below the BOJ’s target level of 2%.

The risk of Japan’s economy deteriorating sharply due to the Iran war is less likely because of government measures including easing the impact on households from high fuel costs, the bank said on Tuesday.

But it added: “Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target.”