Community Trust ScoreVerified
Japan just moved. The Bank of Japan lifted its benchmark interest rate to 1.25% on Friday — the highest level the country has seen since 1995 — as surging energy costs tied to the ongoing conflict in Iran keep squeezing the economy from the outside in.
The board voted 7-2 in favor of the hike. Toichiro Asada and Ayano Sato dissented. Markets had pretty much seen it coming before the meeting even wrapped up, so the immediate reaction was muted. But the bigger picture here is hard to ignore: Japan is now six rate hikes deep into a tightening cycle that started back in March 2024, when the policy rate sat at -0.1%. That’s a long way from where things stand now, and the BOJ isn’t done yet — at least that’s what the bank’s own language seems to say.
Six Hikes Since March 2024
To understand why Japan keeps moving, you have to go back to the oil problem. Japan imported 94% of its crude oil from the Middle East in 2025, most of it flowing through the Strait of Hormuz. The conflict in Iran has choked those shipments. Prices went up. Inflation followed. Headline inflation hit 1.9% in August, and core inflation came in at 1.7% — a slight dip, but still close enough to the BOJ’s 2% target that the bank feels justified in pressing forward. The BOJ said it would keep adjusting its policy rate and its level of monetary accommodation as economic conditions develop. That’s basically central bank language for: more hikes are possible.
And Japan isn’t alone in tightening. The Federal Reserve raised its target range to 3.75%-4.00% on Wednesday — its first increase since 2023. The European Central Bank moved 25 basis points last week, pushing its deposit rate to 2.50%. Japan at 1.25% still looks low by comparison, but the gap is narrowing. Slowly.
The yen situation adds another layer. In August, Tokyo and Washington intervened jointly in currency markets after the yen hit a 40-year low. That was the first coordinated action between the two countries since 2011. It’s a big deal. Currency intervention at that scale doesn’t happen unless there’s real pressure, and it shows how exposed Japan is to external shocks it can’t fully control — oil prices, dollar strength, geopolitical disruption thousands of miles away.
Bank of England Holds Firm at 3.75%
Not every central bank is moving the same direction. The Bank of England kept its rate at 3.75% — the sixth consecutive hold. Three of its nine policymakers pushed to raise it to 4%, but they got outvoted. Bank Governor Andrew Bailey said the impact of global energy costs on UK price and wage-setting has stayed limited so far. UK inflation did reach a five-month high of 3.1% in August, so it’s not like the pressure isn’t there. But Bailey and the majority on the committee aren’t ready to move yet.
That contrast with Japan is pretty stark. Japan is hiking because energy costs are feeding directly into inflation. The UK is holding because, for now, those same energy costs haven’t translated into the same kind of wage and price spiral. Two countries, same global shock, different policy responses. That’s kind of where the world is right now.
Economists think Japan’s rate could reach 1.5% by March 2027, with a further possible rise to 1.75% in the second quarter after that. Those are projections, not promises, and they’re obviously subject to change depending on how the Iran conflict evolves and what happens to oil supply through Hormuz. No one knows how long the disruption lasts.
What the BOJ’s Move Means for Markets
Japan’s reliance on Middle Eastern crude is the core vulnerability here. Ninety-four percent is an enormous share — it leaves almost no buffer when a conflict anywhere near that supply chain flares up. And right now, it’s very much flaring up.
The BOJ’s cautious tone throughout the tightening cycle has been deliberate. It’s not the Fed. It can’t move as aggressively without risking a currency crisis or a collapse in domestic demand. But it also can’t sit still while inflation creeps toward target and the yen loses ground. So it hikes, carefully, one step at a time.
Six hikes since March 2024. Rate at 1.25%. Dissent from two board members. And a coordinated currency intervention with the US already in the books for August.
Frequently Asked Questions
What did the Bank of Japan decide on interest rates?
The Bank of Japan raised its interest rate to 1.25%, the highest since 1995, in a 7-2 board vote, with Toichiro Asada and Ayano Sato dissenting.
Why is Japan raising rates now?
Rising energy costs linked to the conflict in Iran have pushed Japan’s headline inflation to 1.9% in August, with the country importing 94% of its crude oil from the Middle East through the Strait of Hormuz.
Why It Matters
The Bank of Japan's decision to raise interest rates to 1.25% marks a significant shift in its long-standing accommodative monetary policy, reflecting concerns over inflation driven by external factors like the Iran conflict. This move could influence global markets, as it signals a potential pivot for other central banks grappling with rising energy costs and inflationary pressures. Additionally, the decision demonstrates Japan's growing responsiveness to global economic conditions, which may impact investor sentiment and capital flows in the region.
