BOJ Hikes Rates to 31-Year High, Signals Shift in Focus on Inflation

The Bank of Japan (BOJ) raised its policy rate to 1.25% on Friday, marking a 31-year high, as Governor Kazuo Ueda signaled a shift in focus from stimulating inflation to preventing it from overshooting the target.

In a news conference, Ueda emphasized that the BOJ has entered a new phase focused on maintaining stable underlying inflation at 2%, rather than pushing prices up to target. He warned that if underlying inflation were to surpass 2%, it could have negative consequences for Japan's economy.

The rate hike follows similar moves by European and US central banks, which have raised interest rates in response to global inflation risks caused by factors such as the Iran war-induced energy cost spike and expansionary fiscal policies. The BOJ's decision was made by a 7-2 vote, with two policymakers dissenting from the decision.

The BOJ still lags behind its global peers in terms of policy rates, with rates lower than those of the European Central Bank (ECB) and the Federal Reserve (Fed). Analysts polled by Reuters expect the BOJ to hike rates further, predicting a 1.5% rate by end-March next year and 1.75% in the second quarter of 2027.