The Bank of Japan (BOJ) on June 18 announced a 0.25 percentage point rate hike, bringing the benchmark interest rate to 1.0% — the highest level since 1995. This marks the latest step in its exit from ultra-loose monetary policy, aimed at overcoming the prolonged economic stagnation that has persisted since the 1990s.
The BOJ explained that the rate increase was primarily driven by price pressures stemming from the conflict between the United States and Israel with Iran, particularly the surge in oil prices. Japan relies on imports for 95% of its crude oil from the Middle East even before the conflict erupted, making the world's fourth-largest economy vulnerable to fuel price volatility.
In its official statement, the BOJ noted that inflation in Japan is at the target of 2%, but rising oil prices have spilled over into business-to-business activity, potentially leading to broad-based price increases. The central bank also warned of the risk that core CPI could exceed the price stability target.
Prime Minister Sanae Takaichi's government has implemented several energy price control measures, including tapping strategic oil reserves and subsidizing gas and electricity bills for households. As a result, Japan's core CPI (excluding fresh food) rose just 1.4% year-on-year in April.
Min Joo Kang, senior economist at ING, said the rate hike marks a positive shift for Japan's economy, indicating progress toward sustainable growth and price stability. In her view, the BOJ believes the 2% inflation target is within reach, providing a basis for gradual policy normalization.
The BOJ began exiting its ultra-low and negative interest rate policy in 2024, raising rates for the first time in 17 years in March 2024, ending the era of -0.1% rates. Japan had fallen into a prolonged period of weak growth and deflation, known as the 'lost decades', after the asset bubble burst in the early 1990s. However, Japan's GDP grew 2.1% (annualized) in the first quarter of this year, the fastest pace in six quarters.
