Bank of Japan Raises Benchmark Rate to Highest Level in 31 Years

The Bank of Japan (BoJ) decided to raise its benchmark interest rate to the highest level in 31 years on Tuesday (16/6/2026), marking another significant step in normalising monetary policy as it focuses on taming price pressures from energy shocks caused by the United States-Iran war. The BoJ raised its short-term policy rate to 1% from 0.75%, bringing borrowing costs to a level not seen since 1995. This is the first rate increase this year, following a hike in December 2025, and aligns the BoJ with other central banks, including the European Central Bank, which are shifting to tighter policy to combat inflation.

In a statement announcing the decision, the BoJ said the risk of Japan’s economy worsening sharply due to the Middle East conflict had diminished, thanks to government measures to curb household fuel costs and progress in securing alternative energy supplies. However, it noted that the price outlook warrants attention as companies appear to be passing on higher oil costs to one another at a relatively rapid pace, which could push up consumer prices across various goods. “Considering that medium- to long-term inflation expectations have also been rising, there is a risk that underlying inflation could deviate above our price target,” the BoJ said.

The decision was made by a 7-1 vote. Governor Kazuo Ueda missed the meeting and did not vote as he was undergoing hospital treatment for a liver cyst infection. Toichiro Asada, who joined the board in April as the first member handpicked by dovish Prime Minister Sanae Takaichi, dissented, arguing that the downside risks to growth from the Middle East conflict outweighed the inflation risks. Hirofumi Suzuki, chief FX strategist at SMBC, noted that no proposal for a 50-basis-point hike was made, suggesting sharp rate increases are likely to be avoided. He expects the BoJ to continue raising rates gradually, roughly every six months to a year.

Following the rate hike, the Nikkei 225 index surged 1% to a record high, while the yen rose 0.1% to 160.215 per US dollar and the 10-year Japanese government bond yield climbed 3.5 basis points to 2.61%. The BoJ also decided to end its bond reduction programme from April 2027 and will continue buying approximately 2 trillion yen in Japanese government bonds per month. Attention now turns to Deputy Governor Shinichi Uchida’s press conference for clues on the pace and timing of future rate increases, though economists expect the BoJ to avoid making any firm commitments.