Why Japan has raised key interest rate to 31-year high
What's the story
Japan's central bank, the Bank of Japan (BOJ), has raised its key interest rate to a 31-year high. The move comes as part of the country's shift from years of ultra-low borrowing costs and in response to growing economic challenges. The BOJ raised the rate from 1% to 1.25%, a level not seen since 1995.
International response
Global impact of Iran war
The BOJ's decision to raise rates comes as other major central banks are doing the same.
The US Federal Reserve raised its benchmark interest rate for the first time in over three years on Wednesday, while the European Central Bank also raised its borrowing costs earlier this month.
The moves come amid rising energy prices due to the ongoing Iran war, which have been pushing up inflation globally.
Rate history
Gradual approach to rate hikes
The BOJ has been gradually increasing the rate since 2024 when it was at -0.1%. In the last two and a half years, the bank has hiked rates six times.
This gradual approach is part of its strategy to reach a level comparable to other major economies.
Typically, when a central bank raises rates, it strengthens the country's currency by making it more attractive to traders.
Economic hurdles
Japan's economic challenges
Japan is grappling with a number of economic challenges, including a persistently weak yen, rising prices, and a shrinking workforce.
Official figures released on Friday showed that inflation eased slightly last month.
Core inflation fell to 1.7% in August from 1.8% the previous month but remains close to the bank's 2% target level.
Oil impact
Japan's reliance on Middle Eastern energy
Japan is particularly vulnerable to supply disruptions in global oil and gas prices, which have risen this year due to the Iran war. The country heavily relies on energy from the Middle East.
In August, Tokyo and Washington confirmed they had jointly intervened to stop the yen's slide after it hit a new 40-year low.
The coordinated intervention was the first since 2011, when both countries acted together after a devastating earthquake and tsunami struck eastern Japan.