Bank of Japan Raises Rate to 31-Year High Amid Persistent Inflation Risks

The Bank of Japan (BoJ) has increased its benchmark interest rate to 1.25% in a move that brings borrowing costs to their highest level in 31 years. This decision, which was widely anticipated by financial markets, signals further tightening amid persistent inflationary pressures and rising energy costs.

The quarter-point increase from 1% was accompanied by a split vote of 7-2 among the BoJ's policy board members. Board members Toichiro Asada and Ayano Sato voted against the increase, calling for greater caution before raising borrowing costs further.

Despite the rate hike, the yen weakened following the announcement, as investors focused on the lack of a clear signal over the timing of another rate hike. Hirofumi Suzuki, chief foreign-exchange strategist at SMBC in Tokyo, said the rate increase itself was in line with market expectations, while the two dissenting votes came as a modest surprise.

The BoJ has ended its decade-long stimulus programme and has since raised interest rates several times to gradually move away from the negative and ultra-low-rate environment that had made the yen a major low-cost funding currency. The bank's estimated range for the economy's nominal neutral interest rate is between 1.1% and 2.5%, with Japan's policy rate now within this range.