Japan's central bank lifted its policy interest rate to 0.5 percent, marking the highest level since 1995. The Bank of Japan has been gradually unwinding its decades-long experiment with near-zero rates that defined its monetary policy since the 1990s.
This move accelerates a shift that began in early 2024, when the BOJ first signaled its exit from ultra-loose monetary policy. The increase targets persistent inflation that has climbed above the bank's 2 percent target, driven by wage growth and supply-side pressures. Governor Kazuo Ueda has positioned these hikes as necessary to normalize policy after years of keeping rates at or below zero to stimulate economic growth.
The decision carries weight beyond Japan's borders. For decades, ultra-low Japanese rates fueled the carry trade, where investors borrowed yen at minimal cost to invest in higher-yielding assets globally. Each rate increase tightens these positions and can trigger market volatility worldwide. The yen has already strengthened considerably against the dollar this year.
Japan's economy remains fragile despite the rate moves. GDP growth slowed to 0.6 percent annually in recent quarters, and employment conditions show signs of softening. The BOJ faces a delicate balancing act between controlling inflation and supporting growth that hasn't yet fully recovered to pre-pandemic strength.
Other central banks, including the Federal Reserve and European Central Bank, have already begun cutting rates from their 2023-2024 peaks. Japan's move toward tightening positions it distinctly in the global monetary landscape, reflecting its unique inflation challenge and the lag in its economic recovery.