Japan’s central bank raises interest rates to highest level since 1995 | Business and Economy
Bank of Japan Raises Benchmark Rate to 1 Percent, Ending Decades of Low Borrowing Costs
Published June 16, 2026
Japan’s central bank has raised its benchmark interest rate to its highest level in three decades, a significant shift in monetary policy that signals a departure from long-standing low borrowing costs.
In a Tuesday meeting, the Bank of Japan (BOJ) voted 7-1 to increase the rate by a quarter-point to 1 percent. This change marks a critical step in the bank’s ongoing efforts to address rising inflation pressures linked to the ongoing conflict involving the United States, Israel, and Iran.
The BOJ’s decision aligns with a gradual transition away from an ultra-loose monetary policy that has been in place to combat economic stagnation. The adjustment raises the key policy rate to its highest level since 1995.
In its statement, the BOJ acknowledged that while inflation rates are generally on target, rising oil prices are affecting business transactions and could lead to increases in the prices of various goods. The central bank warned that “medium-to-long-term inflation expectations have continued to rise,” which could push the consumer price index (CPI) above the bank’s stability target of 2 percent.
Japan relies heavily on oil imports, sourcing approximately 95 percent from the Middle East prior to the conflict, making the economy sensitive to fluctuations in fuel prices. In response to escalating energy costs, Prime Minister Sanae Takaichi’s administration has implemented measures to stabilize prices, including tapping into strategic oil reserves and providing subsidies for household energy bills.
Japan’s core CPI, which excludes fresh food prices, rose by 1.4 percent in April compared to the previous year, a figure the BOJ attributes to government initiatives aimed at easing the impact of increased energy costs on households.
Economist Min Joo Kang of ING noted that the rate hike could indicate a positive turn for the Japanese economy, suggesting it is moving closer to sustained growth and price stability. “The BOJ now sees its sustainable inflation target of 2 percent as within reach, supporting its confidence in gradually normalizing policy,” Kang said.
The BOJ began its shift away from ultra-low and negative interest rates in 2024, implementing its first hike in 17 years that March after maintaining a -0.1 percent rate.
Japan has faced a prolonged economic downturn known as the “lost decades,” following the collapse of an asset bubble in the early 1990s. Despite previously limited success in reversing this trend, recent indicators suggest tentative signs of recovery, including a 2.1 percent year-over-year growth in gross domestic product for the first quarter of 2026, marking the fastest expansion in six quarters.
