The Bank of Japan (BOJ) has decided to raise interest rates to 1.0%

At its monetary policy meeting on June 16, the BOJ decided to raise its target for the unsecured overnight call rate, its benchmark interest rate, from 0.75% to 1.0%. The BOJ hopes this move will mitigate the risk of increased inflation due to high oil prices stemming from tensions in the Middle East. The BOJ also prioritizes the stability of the bond market and decided to halt its tapering of government bond purchases after next spring.

This is the first interest rate hike by the BOJ in three meetings since December 2025. The 1.0% benchmark interest rate is the highest level since 1995.

At its previous meeting in April, the BOJ postponed a rate hike to observe the situation, citing concerns that rising oil prices would impact both inflation and economic downturn.

Currently, the BOJ is increasingly assessing that the risk of rising prices is greater than the risk of a rapid economic slowdown.

Excluding the effects of government subsidies for electricity and gas bills and other measures to combat inflation, the Bank of Japan’s Consumer Price Index (CPI) rose 2.8% in April compared to the same month last year. The rate of increase accelerated from March (2.5%). The Corporate Price Index (CPI), which reflects price trends in inter-company transactions, rose 6.3% in May, the largest increase in three years and two months.

The temporary agreement reached between the US and Iran to end the war is currently putting downward pressure on US crude oil futures. However, the impact of current raw material price increases is likely to lead to future increases in final product prices due to time lag.

The Bank of Japan aims to maintain its target of around 2% for the core inflation rate, excluding temporary fluctuations. It will adjust its loose monetary policy by raising interest rates to prevent inflation from significantly exceeding this target.

Regarding the reduction in government bond purchases, under the current plan, a further reduction of 200 billion yen per quarter will continue until January-March 2027. A policy to stop reducing purchases in April 2027 and continue purchasing government bonds at a rate of 2.1 trillion yen per month is expected to be finalized.

The Bank of Japan (BOJ) implemented an ultra-loose monetary policy starting in 2013, consistently purchasing large amounts of long-term government bonds. This move aimed to stimulate the economy and escape deflation by lowering long-term interest rates, but it significantly weakened the market function of interest rates, which was determined by investor buying and selling. Starting in August 2024, the BOJ began reducing its purchases, resulting in a more free formation of interest rates based on investor supply and demand, thus improving market function.

After 2025, there is an increasing likelihood of bond market instability, such as temporary interest rate increases. If the BOJ were to halt the reduction in its government bond purchases, concerns about worsening supply and demand are expected to ease, potentially leading to market stability.

The BOJ’s holdings of government bonds have been steadily decreasing due to the repayment of previously purchased bonds. The BOJ is considering striking a balance between improving the function of the government bond market and maintaining market stability.