Yen Weakens, BOJ Raises Interest Rates to 1 Percent, Highest in 31 Years

JAKARTA - The Bank of Japan (BOJ) raised its benchmark interest rate to 1 percent, the highest level in 31 years. This policy was taken amid a weakening yen exchange rate and increased inflationary risks due to a surge in crude oil prices triggered by conflicts in the Middle East.

Based on a Kyodo News report quoted Tuesday, June 16, the BOJ raised its short-term interest rate from 0.75 percent. This is the first increase since December, after the central bank maintained the interest rate in the previous three policy meetings.

The move marks the continuation of the normalization process of Japan's monetary policy after more than a decade of implementing unconventional monetary easing policy which ends in March 2024.

In its statement, the BOJ warned of the risk of core inflation rising above the 2 percent target. Core inflation is a measure that reflects the trend of more fundamental price increases, beyond temporary price fluctuations.

According to the BOJ, the rise in crude oil prices has the potential to encourage companies to raise prices in inter-business transactions, which in the end can spread to price increases of various goods and services for consumers.

BOJ Deputy Governor Shinichi Uchida said the central bank would still continue to adjust interest rates to keep inflation stable around the 2 percent target. However, according to him, Japan's financial conditions after the latest interest rate hike are still considered supportive of economic activity.

Uchida explained that the decision to raise interest rates was also supported by reduced risks to the economy. One of them is because the Japanese government's steps to secure alternative sources of raw materials, including oil supplies from outside the Middle East region.

The agreement between the United States and Iran to end the conflict is considered a positive development. However, the BOJ considers that uncertainty about economic conditions still exists.

The BOJ also continues to monitor the movement of the yen exchange rate. On Tuesday afternoon trading in Tokyo, the US dollar was above the 160 yen level, a point that previously prompted Japanese financial authorities to intervene in the foreign exchange market to support the currency.

"We do not target a specific exchange rate level in conducting monetary policy. However, currency movements have an important influence on economic and price developments," Uchida said as quoted by Kyodo News.

The decision to raise the interest rate was not fully agreed by members of the BOJ policy board. Of the eight members who discussed policy changes without the presence of Governor Kazuo Ueda, only Toichiro Asada expressed his rejection.

Asada, who joined the BOJ Policy Board in April, is known as a supporter of reflationary policies or efforts to encourage price increases through more aggressive monetary easing.

In another policy, the BOJ also decided to temporarily suspend plans to reduce purchases of Japanese government bonds starting in the next fiscal year starting in April.

For the rest of this fiscal year, the BOJ will continue to reduce bond purchases by around 200 billion yen each quarter. With this move, bond purchases are expected to reach around 2.1 trillion yen or around 13 billion US dollars per month in the last quarter of fiscal year 2026.

However, starting April 2027, the BOJ will no longer reduce bond purchases and will maintain purchases of around 2 trillion yen per month to maintain stability in the bond market.

The two-day monetary policy meeting was led by BOJ Deputy Governor Ryozo Himino as Governor Kazuo Ueda underwent treatment for a cyst infection. Uchida confirmed that the condition was temporary and would not have a significant impact on the direction of the BOJ's monetary policy.

Japan's inflation risk is increasingly a concern after wholesale prices in May rose 6.3 percent compared to the same period a year earlier. The increase was the highest in more than three years as companies began passing on the cost increases due to the war in Iran to the prices of goods and services.

The data suggests core consumer inflation could pick up, although it has so far been held back by government subsidies for electricity, gas and fuel oil, according to analysts cited by Kyodo.