BOJ Accelerates Rate Hikes Amid Inflation Risks and Weakening Yen

The Bank of Japan (BOJ) has accelerated its interest rate hikes, with the policy rate now at a 31-year high of 1.25 percent following a hike on Friday. This marks the first increase in three months, the shortest interval between hikes since the BOJ ended its unorthodox monetary easing in March 2024.

Economists expect the BOJ to continue raising rates by a quarter percentage point every three months, rather than once every six months as it has done for more than two years. Takeshi Minami, chief strategist at Norinchukin Research Institute, expects the rate to reach up to 1.75 percent to address higher-than-expected inflation in the second half of fiscal 2026.

Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, sees the terminal rate at 1.5 percent but possibly 2 percent if the Middle East conflict worsens, sending energy prices far higher. The BOJ faces a challenge in moving ahead with rate hikes to contain inflationary risks without doing excessive damage to economic activity.

The Japanese central bank's decision comes as Japan begins to see consumer purchasing power recover on the back of wage increases of more than 5 percent for the third consecutive year in 2026. However, signs of a pickup in demand are helping more companies pass high input costs on to consumers, while import costs remain high due to a stubbornly weak yen and surge in crude oil costs.