BOJ raises its policy rate to 1.0% — a 31-year high.

At its June 16 Monetary Policy Meeting, the BOJ raised its policy rate (the target for the uncollateralized overnight call rate) from 0.75% to around 1.0%, a hike of 0.25%. A level of 1.0% is the highest in about 31 years, since 1995. The vote was 7 in favor, 1 against. Notably, Governor Kazuo Ueda was absent, hospitalized for treatment, and Deputy Governor Shinichi Uchida stood in for him at the press conference.

Behind the move is the entrenchment of a virtuous wage-price cycle. With high pay raises continuing for a third straight year (the first tally of the 2026 Shunto came in at +5.26%), Deputy Governor Uchida made the path of further hikes clear at the press conference, saying the Bank would "continue to raise the policy rate" in response to economic, price, and financial developments. The risk that higher oil prices tied to Middle East tensions could push up inflation also supported the hike.

The BOJ's policy rate sat for years in negative territory at −0.1%. The turning point was the end of negative rates in March 2024. The Bank then climbed the staircase one step at a time ― 0.25% in July that year, 0.5% in January 2025, 0.75% in December 2025 ― reaching 1.0% today. As the world's major central banks enter a rate-cutting phase, Japan is one of the few countries raising rates.

While other countries are "coming down the mountain," Japan has only "just begun to climb." Even so, at 1.0% it remains considerably lower than the United States (3.6%) or the UK (3.75%). This wide rate gap has been the main driver of the long-running weak yen. As the Bank raises rates further, the gap will gradually narrow.

The latest core CPI (excluding fresh food, for April) was +1.4% year on year ― in fact below the 2% target. The BOJ nonetheless moved to hike because it places weight on the outlook for prices ahead. Its Outlook Report (April 2026) projects inflation of +2.8% for fiscal 2026, above the target.

Core-core CPI, which also excludes energy and food, was +1.9%, with the underlying trend in prices edging toward 2%. Pay raises are being passed through into prices, and service prices have been rising — the judgment that this "virtuous wage-price cycle" has taken hold is the basis for the hike. That said, the gap between the current reading (1.4%) and the outlook (2.8%) is large, and the projection could undershoot if higher oil prices run their course.

Beyond rates, the BOJ is also pursuing normalization by reducing its purchases of Japanese government bonds (JGBs), which it had been buying in huge volumes. At this meeting it decided to fix the pace of reduction at about ¥2 trillion per month from April 2027. Mindful of a spike in long-term yields, it has chosen to prioritize market stability.

The BOJ is reducing its purchase amount in stages each quarter, trimming it to about ¥2 trillion per month by the January–March 2027 quarter, after which it will halt further reductions. Raising rates while avoiding abrupt swings in the JGB market — managing this "two-front normalization" carefully, without surprising markets, is the BOJ's challenge.

Monetary policy is decided by a majority vote of the nine Policy Board members at the Monetary Policy Meeting, held eight times a year. The membership is one Governor, two Deputy Governors, and six Board members. This time, with the Governor absent, the vote was taken by eight members, and the hike was decided 7 in favor, 1 against.

The chair is normally Governor Ueda, but this time Deputy Governor Uchida stood in at the press conference. The Governor's hospitalization was described as "short-term, with no impact on policy management." The meeting was held over two days, and the decision is announced around midday on the second day.

There are eight meetings a year. At the January, April, July, and October meetings, the "Outlook Report" presenting the economic and price outlook is published, drawing particular market attention. With today's meeting over, the next is July 30–31 (an Outlook Report release).

The market's biggest focus is when the next hike will come. With Deputy Governor Uchida signaling openness to further hikes, speculation lingers about another increase within the year. How the July Outlook Report frames the outlook for prices and wages will be the next clue.

The BOJ's rate has a large bearing on the dollar-yen rate. When Japanese rates rise and the gap with the United States narrows, the natural pull is toward a stronger yen. This time, however, the hike was seen as "within expectations," and dollar-yen held in the 160s. The wide rate gaps versus the US and Europe remain a drag on the yen.