Japan's central bank has increased its main interest rate to a new 31-year high after a surge in global energy prices. On Tuesday, the Bank of Japan (BOJ) raised its policy rate to 1% from 0.75% — a level not seen since 1995.

The decision comes as some other central banks have raised interest rates this year, allegedly due to the US-Israel war with Iran pushing up the cost of living. Japan's rates were cut aggressively in the 1990s to combat asset price collapses and had been near zero for two decades.

The bank has been gradually raising its rate since March 2024. Japan economist Jesper Koll stated: "After twenty years of deflation, Japan is now in an inflationary upcycle. Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy."

Higher energy prices have fueled inflation, adding pressure on Japan, which depends heavily on Middle Eastern oil and gas. Wholesale prices climbed by over 6% in May from a year earlier, the fastest pace in three years. However, overall inflation at 1.4% in April remains below the BOJ's 2% target.

The BOJ faces a tricky trade-off: raising rates could lower inflation but also makes borrowing costlier. Governor Kazuo Ueda missed this week's meeting due to hospitalization for an infected liver cyst but has expressed support for rate hikes.

Prime Minister Sanae Takaichi, known for supporting spending, has not publicly criticized the BOJ's push for higher rates since taking office. The latest rise is the second under her tenure.

The decision also aims to stabilize the yen, which has been under pressure from major currencies. Ulrike Schaede, a business professor at UC San Diego, noted: "There has been a sense that the yen is too cheap and that raising its currency will not hurt."

Source: www.bbc.com