BOJ Hikes Rate to 1.25%, Highest in 31 Years, Amid Inflation Concerns

The Bank of Japan (BOJ) has increased its benchmark interest rate to 1.25%, the highest level since 1995, as part of a broader effort to manage inflation and control the economy.

The decision, which was widely anticipated by investors, came after a meeting of the BOJ's Monetary Policy Council on Friday. The increase of 25 basis points is supported by the moderate rise in core consumer price index (CPI), which excludes fresh food, and is seen as a response to the transfer of higher costs among companies and the incorporation of wage increases into final prices.

The BOJ notes that the rising cost of oil, weakness of the yen, and intense pressure from the artificial intelligence sector are driving up national business price index. The institution also warns of uncertainty for the central scenario of the Japanese economy due to factors such as the evolution of the situation in the Middle East, volatility in foreign exchange markets, and the dynamism associated with AI.

The BOJ's governor emphasized that the financial conditions in Japan remain 'loose' and that real interest rates are expected to remain low. The institution aims to adjust the degree of monetary stimulus to steer the 2% inflation target sustainably while ensuring an expansive financial environment after the rate hike.