Bank of Japan Raises Policy Rate to 1%, Highest Since 1995, as Inflation and Weak Yen Force Action

The Bank of Japan (BOJ) has delivered one of the most consequential moves in its decades-long journey out of ultra-loose monetary policy, raising its benchmark overnight call rate by 25 basis points to 1.00% on June 16, 2026. The decision, taken at the conclusion of a two-day Policy Board meeting, lifts Japanese borrowing costs to their highest level since September 1995 — a 31-year high — and was in line with the near-unanimous expectations of economists, with a Reuters poll having shown roughly 94% anticipating the move.

The Policy Board voted 7-1 in favour of the hike, with board member Toichiro Asada the sole dissenter, arguing that downside risks to production and employment outweighed the upside risks to prices. Alongside the rate increase, the BOJ said it would continue trimming its purchases of Japanese government bonds, advancing its balance-sheet normalization. This marks the BOJ's first hike since December 2025, when it raised rates to 0.75%, and represents the continuation of a tightening cycle that began with the historic exit from negative interest rates in March 2024.

The catalysts are a persistently weak yen and creeping inflation. Japan's heavy dependence on imported crude oil from the Middle East has meant that the regional conflict and elevated energy prices have fed directly into consumer prices, while a depreciating yen has amplified imported inflation. The BOJ had earlier revised its fiscal 2026 core inflation forecast sharply upward to a 2.5%–3.0% range — well above its 2% target.

Markets reacted in measured fashion: the benchmark Nikkei 225 rose around 0.46% after the announcement, the yen strengthened marginally to about 160.22 against the US dollar, and yields on 10-year Japanese government bonds climbed roughly 3 basis points to 2.615%. The BOJ signaled it will continue adjusting policy if economic activity and prices evolve in line with its projections, while noting that real interest rates remain low and accommodative even after the hike. Notably, the decision came within a remarkable 72-hour window that also saw the US Federal Reserve and the Bank of England hold their respective policy meetings.