BOJ Raises Rate to 31-Year High as It Pivots on Inflation Risk

The Bank of Japan (BOJ) raised its key interest rate to 1.25 percent on Friday, marking a 31-year high. BOJ Governor Kazuo Ueda said that with underlying inflation approaching 2 percent, the central bank's focus has shifted from pushing prices up to target to guarding against an inflation overshoot.

Ueda stressed that if risks of underlying inflation overshooting 2 percent materialize, it could have a negative impact on Japan's economy. He refused to rule out back-to-back rate hikes or increases of 50 basis points, but emphasized the BOJ aims to act pre-emptively to avoid large moves that could unsettle financial markets.

The move follows rate hikes by European and U.S. peers, highlighting central banks' focus on global inflation risks caused by energy cost spikes, expansionary fiscal policies, and surging demand for AI investment. The BOJ's decision was a 7-2 vote, with dovish board members Toichiro Asada and Ayano Sato dissenting from the decision.

Analysts polled by Reuters expect the BOJ to hike rates to 1.5 percent by end-March next year and to 1.75 percent in the second quarter of 2027, with most seeing the terminal rate at least 1.75 percent.