BOJ Raises Interest Rate to 1.25% Amid Energy Pressure

The Bank of Japan (BOJ) raised its policy rate to 1.25% on Friday, marking the highest level since 1995. The decision follows rising energy costs due to the Iran conflict putting pressure on the economy.

The board split 7-2 in favor of the hike, with Asada Toichiro and Sato Ayano voting against. Markets had already largely priced in the move before the meeting concluded.

This rate increase comes amid a week of concentrated central bank decisions. The Federal Reserve raised its target range to 3.75%-4.00% unanimously on Wednesday, marking its first hike since 2023. The European Central Bank (ECB) had previously increased three key rates by 25bps, adjusting the deposit rate to 2.50%.

Despite Friday's move, Japan remains significantly below other major central banks. This adjustment marks the BOJ's sixth hike in this cycle, starting from -0.1% in March 2024 when tightening began.

The common factor is fuel: Japan imports 94% of its oil from the Middle East via the Strait of Hormuz. The Iran conflict disrupted shipping routes, driving up prices. Japan's headline inflation was 1.9% in August, while core inflation eased to 1.7% from 1.8%.

Britain took a different path, keeping its policy rate at 3.75% for the sixth consecutive meeting, with three members advocating for a rise to 4%. The Bank of England had previously frozen rates amid 3.1% inflation in August—the highest in five months—but faces no similar yen pressure as Japan and the U.S., which jointly intervened in August following a 40-year low.