Japan raises interest rate to highest since 1995

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 so-called policy rate to 1% from 0.75% - its highest level since 1995.

The decision comes as some other central banks have raised interest rates this year as the Iran war pushed up the cost of living.

Japan's interest rates were cut aggressively in the 1990s to combat the fallout from a collapse in prices of assets like property and shares. They had been near zero for two decades as prices fell and growth stagnated.

The bank has been gradually raising its rate since March 2024 - at the time it was the country's first hike in 17 years.

"After twenty years of deflation, Japan is now in an inflationary upcycle," Japan economist Jesper Koll told the BBC.

"Emergency/crisis management monetary policy is no longer needed and the BOJ wants to get back to a normal monetary policy," he added.

The BOJ has been under pressure to cool inflation, which was extremely low in the country until relatively recently.

Higher energy prices have fuelled inflation, adding pressure on countries like Japan that depend heavily on oil and gas from the Middle East.

Japan's wholesale prices climbed by more than 6% in May from a year earlier, rising at the fastest pace in three years.

But the country's overall inflation rate, which was 1.4% in April, currently sits below the BOJ's target level of 2%.

The BOJ faces a tricky trade-off: Raising interest rates could help lower inflation but higher rates also make borrowing costlier, increasing expenses for the government and businesses.