Japan lifts policy rate to 1.25%, its steepest in three decades

The Bank of Japan announced on Monday that it has increased its key policy rate from 1.0% to 1.25%, marking the highest level since 1995. The move, reported by Al Jazeera, is the first hike in 17 years and pushes the rate to a 31‑year peak.

Inflation data released earlier this week showed consumer prices climbing faster than the central bank’s 2% target, prompting officials to act. Al Jazeera noted that the rise in price pressures has heightened concerns that the economy could slip into a wage‑price spiral if left unchecked.

The decision ends a decades‑long experiment with near‑zero or negative rates that began after Japan’s asset‑price bubble burst in the early 1990s. The BOJ kept rates at or below 0% for most of the 2000s, only briefly nudging them up in 2006‑07 before reverting to ultra‑easy policy following the global financial crisis. The new 1.25% level therefore represents the steepest increase since the mid‑1990s, a shift that signals a fundamental re‑orientation of monetary strategy.

Analysts expect the hike to have immediate effects on the yen, which may appreciate against major currencies as higher yields attract foreign capital. Domestic borrowers, from households with mortgages to corporations with large debt loads, will face higher financing costs. At the same time, the policy change could help anchor inflation expectations, a key goal for the BOJ after years of deflationary risk.

Looking ahead, the central bank signalled it is prepared to adjust rates further if price growth remains above target. Markets are now watching closely for additional moves, while other major central banks continue to tighten in response to global inflationary pressures. The BOJ’s pivot underscores a broader trend of policymakers abandoning the ultra‑accommodative stance that dominated the post‑crisis era.