Bank of Japan set to raise interest rates to 31-year high amid inflation risks

The Bank of Japan is anticipated to lift its policy rate to 1%, reaching its highest point in almost 30 years as it continues to normalize monetary policy.
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KIM KYUNG-HOON

The Bank of Japan is poised to increase its benchmark rate to a 31‑year peak on Tuesday, another notable move in its monetary‑policy normalization effort aimed at curbing inflationary pressures stemming from the energy shock linked to the Iran conflict.

This would mark the first rate increase since December, bringing the BOJ in line with other central banks—including the European Central Bank—that are tightening policy to fight inflation.

Market attention will focus on how a potential U.S.–Iran peace agreement, which could ease global inflationary forces, influences the BOJ’s guidance on the speed and timing of any further rate hikes.

After the meeting, Deputy Governor Shinichi Uchida will give a press briefing; Governor Kazuo Ueda will be absent due to a two‑week hospital stay for treatment of an infected liver cyst and will not participate in the vote, leaving the decision to the eight remaining board members, most of whom favor a hike.

Uchida is expected to reaffirm the BOJ’s commitment to continue raising rates while refraining from giving clear signals about the timing of the next increase, amid ongoing uncertainty over the Middle East, according to former chief economist Seisaku Kameda.

“Uchida excels at delivering messages with constructive ambiguity. Given the uncertain outlook, he will indicate the BOJ’s readiness to act swiftly,” Kameda added, forecasting a hike in June followed by another later in the year, possibly between October and December.

WEAK YEN PRESSURE

During the two‑day policy meeting concluding on Tuesday, the BOJ is widely anticipated to lift its short‑term policy rate from 0.75 % to 1 %, pushing borrowing costs to levels not seen since 1995.

A rise to 1 % would place the BOJ’s policy rate at the lower end of its estimated neutral band of 1.1 %‑2.5 %, suggesting a need for caution.

“We hope the BOJ will communicate clearly and coordinate closely with the government to achieve its inflation target sustainably,” said Economic Revitalisation Minister Minoru Kiuchi at a Tuesday news briefing.

Known for advocating loose fiscal and monetary stances, Kiuchi noted he will attend Tuesday’s meeting as one of the two government representatives who lack voting rights but may voice their opinions to the board.

The Middle East turmoil has complicated the BOJ’s policy trajectory by adding inflation via higher oil prices while straining an economy that depends heavily on imported fuel.

At its April meeting, the BOJ left rates unchanged but markedly lifted its inflation forecasts and warned of the risk of overshooting inflation; three of its nine members had advocated a 1 % increase.

A series of hawkish signals from the BOJ since then have led markets to almost fully price in a June rate increase. A Reuters survey showed economists expecting the BOJ to raise rates to 1.25 % by the fourth quarter, following a June hike to 1 %.

Although government subsidies have kept core consumer inflation below the BOJ’s 2 % goal, analysts anticipate broader price pressures as wholesale inflation surged to a three‑year high of 6.3 % in May.

A depreciating yen, which raises import costs and fuels wider inflation, will continue to press the BOJ to stay on a path of further rate increases, analysts say.

“There remains considerable uncertainty about how a possible Iran peace deal could influence oil prices and domestic inflation,” remarked Tetsuya Inoue, executive economist at Sony Financial Group.

“I also question whether Japan’s economy can withstand faster rate hikes, given that the BOJ’s policy rate is nearing levels regarded as neutral to economic activity,” he added.

Published on June 16, 2026