Japan Raises Policy Rate to Highest Since 1995

Bank of Japan will continue raising interest rates while closely monitoring the risk that underlying inflation could exceed its 2% target, Deputy Governor Ryozo Himino said on Friday. He noted that wholesale inflation has been accelerating as firms pass on higher costs stemming from the Middle East conflict, raising the possibility of broader price pressures. "There is a risk underlying inflation may deviate upward from our target," Himino told parliament, explaining the central bank's decision to lift its policy rate to 1% earlier this week. While higher oil prices could weigh on growth, he added that Japan's economy remains resilient, supported by strong corporate profits and rising household income. Meanwhile, minutes from the central bank's April meeting showed policymakers agreed that, with underlying inflation nearing 2% and real interest rates still low, it was appropriate to continue gradually lifting rates while assessing the impact of geopolitical volatility on the economy.

The Bank of Japan lifted its key short-term rate by 25bps to 1.0% in a 7-1 vote at its June meeting, marking the highest level since September 1995 and aligning with market expectations. The decision aimed at preventing the Iran war-driven energy shock from fueling broader inflation. The move also marked the central bank's first rate hike since December and its first regular policy meeting without the governor in attendance. Board member Asada Toichiro dissented, citing greater downside risks to production and employment than upside risks to prices. In its policy statement, the board said underlying inflation could accelerate above 2% target amid rising energy costs. It also noted that financial conditions would stay accommodative despite the rate hike, continuing to support economic activity. Policymakers stated that they will continue raising rates as warranted by economic, price, and financial developments, while closely monitoring the Middle East conflict's impact on the economy.

Bank of Japan Deputy Governor Ryozo Himino said the central bank remains committed to further interest-rate hikes, though the timing and pace will depend on how the Middle East conflict affects Japan’s economy and inflation. Speaking before a parliamentary committee on Tuesday, Himino stressed that Japan’s real interest rates remain “at extremely low levels,” adding that the BoJ will “continue to raise the policy rate and adjust the degree of monetary accommodation in accordance with economic, price, and financial developments.” However, he avoided signaling when the next rate increase could occur, noting that policymakers are closely monitoring the economic and price impact of geopolitical tensions in the Middle East. Himino also said the central bank aims to maintain market credibility through appropriate monetary policy management and the stable achievement of its inflation target.