BOJ raises policy rate to 1%, highest in 31 years

2026-06-16

The Bank of Japan decided at its Jan. 16 monetary policy meeting to raise interest rates for the first time in six months, lifting the policy rate to 1%. The level is the highest in 31 years. The BOJ has entered a difficult phase as it seeks to deliver price stability without causing a sharp cooling in the economy.

Meeting decision

The meeting was held without Governor Kazuo Ueda, who was hospitalized for treatment of an infectious disease. A policy change in the governor's absence was unusual, and the rate hike was approved by a majority vote among the eight policy board members excluding Ueda, with seven in favor.

Pressure from prices and foreign exchange

The BOJ's decision to raise rates for the first time since Dec. 2025 reflected its view that tensions in the Middle East have pushed up crude oil prices, increasing the risk that inflation could accelerate through price increases across a wide range of goods.

Deputy Governor Shinichi Uchida told a news conference after the meeting that strong corporate earnings and government measures to curb high prices were underpinning the economy, adding that 'the risk of the economy falling sharply below trend has eased compared with some time ago.' He also warned that pass-through of higher costs between companies was proceeding at a somewhat faster pace, and cautioned that underlying inflation could accelerate beyond the BOJ's 2% price stability target.

Although crude oil prices are stabilizing after a provisional agreement aimed at ending hostilities between the United States and Iran, Uchida said the move toward easing tensions was 'desirable' but stressed that its impact on the economy and prices needs to be assessed carefully.

Future rate hikes and bond buying

The foreign exchange market remains under persistent pressure from a weaker yen, which is also helping to drive import-driven inflation. Uchida said that as more companies become willing to raise wages and prices, exchange-rate moves are increasingly likely to affect prices.

The government and the BOJ carried out large-scale yen-buying intervention during the long holiday period from late April, but the yen has since recovered to around 160 per dollar, roughly back to the level seen before the intervention. Overseas central banks are also maintaining a tightening stance, and unless the gap between domestic and foreign interest rates narrows, pressure to sell the yen is unlikely to ease.

Market attention has shifted to the timing of the next rate hike. Based on the view that corporate price increases reflecting this spring's higher raw material costs will spread around autumn, some market participants expect the next hike to come at the October meeting. Uchida said the BOJ would 'continue raising rates and bring underlying inflation to 2%,' but gave no specific timing or pace.

When asked about the risk of being behind the curve, he said the BOJ intends to continue lifting the policy rate while managing policy appropriately so as not to fall into that situation. He also referred to the neutral rate, but said the BOJ's March estimate of a nominal neutral rate of 1.1% to 2.5% had 'considerable dispersion and is not very useful.' He said the central bank will look at changes in the economy, prices and financial conditions after the rate hike as it searches for the appropriate endpoint.

The meeting also decided on a new plan for JGB purchases. Through the Jan.-Mar. quarter of 2027, the BOJ will reduce purchases by 200 billion yen each quarter in line with the current plan, and from April that year it will stop reducing the amount and continue buying bonds at a pace of about 2 trillion yen per month. The BOJ has bought massive amounts of long-term government bonds under its extraordinary easing program, but the side effects of distorting free market formation for interest rates had been intensifying. The reduction that started in Aug. 2024 improved market functioning, and Uchida said 'the need to reduce purchases further has diminished.' Rising long-term yields have also become more noticeable since 2025, and the BOJ aims to balance that with market stability.

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