Japan's BOJ raises rates to 30-year high as inflation bites

The Bank of Japan raised its key short-term policy rate to around 0.75%, the highest level in 30 years, as inflation remains stubborn and living costs bite for households. In a widely expected decision, the BOJ's policy board, led by Governor Kazuo Ueda, increased the benchmark rate by a quarter of a percentage point. It marked the first rate hike since January and the first since Sanae Takaichi took office as prime minister, a development that has placed inflation-fighting at the top of policy priorities even as authorities seek to keep government borrowing costs low.

The move underscores a historic shift after nearly three decades of ultra-low rates in Japan, and it comes as traders weigh the policy transition against the currency’s strength. A higher policy rate can support the yen and help ease import-led inflation, but economists warned that the impact on price pressures may be limited in the near term, given the breadth of inflation drivers beyond monetary policy and the yen’s continued weakness.

Official data released Friday showed inflation, excluding food and energy, rising 3% in November, still above the BOJ's 2% target. Shoki Omori, chief strategist at Mizuho in Tokyo, told the BBC that while the rate rise is a significant shift, its immediate effect on inflation may be muted because currency markets had already priced in the move and the yen remains relatively weak.

Most economists expect the BOJ to lift rates again next year, potentially taking the benchmark to around 1%. "What we're seeing is a historic shift after nearly three decades of long standing low rates in Japan," said Julia Lee, head of equity strategy at Pacific FTSE Russell, part of the London Stock Exchange Group. But Shigeto Nagai, head of Japan economics at Oxford Economics, suggested that Prime Minister Takaichi's stance could complicate further hikes, noting the BOJ will likely need time—perhaps six months—to observe how the rate increase affects the real economy before taking another step.

The decision comes as other major central banks move in the opposite direction, lowering borrowing costs to support growth. The Bank of England cut its main interest rate to 3.75%, the lowest since February 2023, and last week the U.S. Federal Reserve trimmed its target range by 0.25 percentage points to 3.50%–3.75%, its lowest level in three years.

The BOJ’s rate rise signals a clear intent to tighten policy gradually in response to persistent inflation, even as the government aims to preserve cheap financing for a large fiscal footprint. Market watchers will be watching the next policy decision closely for signs about how quickly the BOJ plans to normalize policy and how it will calibrate the balance between price stability and support for economic growth.