Bank of Japan Raises Rate to 1%, First Since 1995

The Bank of Japan raised its policy rate by 25 basis points to 1.00%, the first time since 1995 the benchmark has reached that level. The move was widely expected and marks the highest interest rate in 31 years.

Approved by a 7-1 vote, the decision came with a dissent from board member Toichiro Asada. He argued that downside risks to production and employment from the Middle East situation outweighed the upside risks to inflation, so he favored leaving policy unchanged.

Governor Kazuo Ueda was absent from the meeting. He is hospitalized for treatment of a hepatic cyst infection, leaving other policymakers to handle communications.

Alongside the rate increase, the BoJ announced adjustments to its government bond purchase program. It will keep reducing JGB purchases by about JPY 200bn per quarter through March 2027, maintaining the current pace of quantitative tightening. From April 2027 onward, however, the bank plans to slow the pace of reductions. Long-term JGB yields have risen sharply in recent months.

Under the revised plan, monthly bond purchases will decline to around JPY 2.1tn by the January-March quarter of 2027. The combination of a rate hike and a more cautious approach to future balance-sheet reduction signals the BoJ remains committed to normalization while trying to limit excessive volatility in the government bond market.

For the yen, the rate increase was widely telegraphed, and the initial FX reaction was muted. Markets now look to July's updated economic projections and Ueda's eventual return for guidance on how much further rates could rise. A related piece on the BOJ's earlier moves is available here, covering the currency and broader market implications.