NEW DELHI: Japan’s central bank on Tuesday raised its benchmark interest rate to the highest level in 31 years, signalling a major shift in the country’s monetary policy amid rising inflation and increasing global energy prices.

The Bank of Japan (BOJ) increased its key policy rate from 0.75% to 1%, marking the highest level since 1995. The decision comes as rising oil and gas prices, fuelled by geopolitical tensions in the Middle East, continue to increase living costs in several economies, including Japan.

The move reflects Japan’s gradual departure from decades of ultra-low interest rates introduced to combat deflation and weak economic growth following the collapse of property and stock market prices in the 1990s. For nearly two decades, Japan maintained near-zero borrowing costs as prices remained stagnant and economic growth slowed.

The BOJ began tightening monetary policy in March 2024 with its first interest rate hike in 17 years. Since then, policymakers have gradually raised borrowing costs as inflationary pressure strengthened.

Higher global energy prices have placed additional strain on Japan, which relies heavily on oil and gas imports from the Middle East. Official data showed Japan’s wholesale prices rose by over 6% in May compared to the previous year, recording the fastest increase in three years. However, the country’s overall inflation rate stood at 1.4% in April, still below the BOJ’s 2% target.

In its statement, the central bank said government measures to reduce the burden of high fuel costs on households could limit economic risks from regional conflicts. However, it warned that medium- and long-term inflation expectations continue to rise, increasing the possibility of inflation exceeding its target.

The rate increase also aims to support the Japanese yen, which has weakened against major global currencies, including the US dollar and euro. Economists believe a stronger currency could help reduce import costs and ease inflationary pressure.

BOJ Governor Kazuo Ueda did not attend this week’s meeting as he is undergoing treatment in hospital. However, he has previously supported discussions on further rate hikes if inflation risks continue to outweigh economic concerns.

Despite the increase, Japan’s interest rate remains significantly lower than rates in major economies such as the United States and the United Kingdom, where borrowing costs currently remain above 3%.