Bank of Japan raises rates to 31-year high

The Bank of Japan raised interest rates by 25 basis points to 1.25 percent on Friday, taking them to their highest level since 1995 as it seeks to counter inflation pressure from higher energy prices and a weak yen.

The decision was approved by a 7-2 majority vote. The central bank said underlying CPI inflation had been approaching two percent and financial conditions remained accommodative, adding that it would continue to raise the policy interest rate.

Bank of Japan Governor Kazuo Ueda told a news conference that it was important to stabilise underlying inflation and avoid it rising above the two percent target with an adverse impact on the economy.

The yen weakened to more than 157 per dollar after the announcement, compared with around 156.30 before it. The currency had fallen to a 40-year low against the dollar in July, prompting a joint US-Japanese intervention in foreign exchange markets.

Japan's core inflation fell to 1.7 percent in August from 1.8 percent, internal affairs ministry figures showed Friday. The reading, which excludes volatile fresh food prices, remained close to the Bank of Japan's two percent target. Government support for gasoline and electricity fees contributed to the slower inflation pace.

Marcel Thieliant of Capital Economics said higher energy costs were feeding through and that he expected inflation to rise above the Bank of Japan's target before long. Stephen Innes of Quintex Intel said traders had looked for signs the central bank could move faster, but that two board members were already arguing Friday's increase had come too soon.

The Japanese government has tried to reduce the effect of inflation on households through a stimulus package, energy tax breaks and consumption-support measures. Tokyo also decided this week to cut the consumption tax on food products from eight percent to one percent for two years starting in April 2027.