The Bank of Japan has raised its trendsetting interest rate by 25 basis points to 1.25%, the highest level since 1995.
The central bank’s governors voted 7-2 in favour of the interest rate increase, which was widely expected by economists and analysts.
Financial markets had priced in a 90% chance that the Bank of Japan would raise interest rates by 25 basis points.
In a statement, the central bank said higher rates are needed because there’s a risk that inflation will move above its 2% annualized target.
The latest rate hike comes amid rising inflation in Japan as well as a historically weak yen currency. In August, Japan’s inflation rate rose to an annualized rate of 1.9%.
The yen currency dipped 0.45%, while the benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947% immediately after the interest rate increase was announced.
The U.S. has been vocal about Japan continuing its rate-hiking cycle to help boost the yen currency.
U.S. Treasury Secretary Scott Bessent recently called on Japan to take “decisive market and monetary steps” to strengthen the yen and the Japanese economy.
Japan’s interest rate hike comes days after the U.S. Federal Reserve also lifted its key rate by 25-basis point to counter inflation. It was the first rate increase in America in three years.
