Bank of Japan raises its key interest rate to a three-decade high of 1%, citing inflation

TOKYO — The Bank of Japan raised its benchmark interest rate to 1% on Tuesday, citing challenges stemming from a weak Japanese yen and higher prices.

The central bank's increase in the uncollateralized overnight rate, by a quarter of a percentage point from 0.75%, puts it at a three-decade high.

The central bank has been trying to normalize monetary policy lately after decades of keeping interest rates near or below zero. It adopted ultralow rates to try to encourage more borrowing and spending to counter deflation and pull the economy out of the doldrums.

Inflationary pressures because of the war in Iran, which has sent oil prices soaring in recent months, have hit Japan hard since it imports almost all its oil and gas.

Low interest rates have added to pressures on the Japanese yen, which has fallen lately to about 160 yen to the U.S. dollar.

The central bank said in a statement that the economy has recovered but the rise in crude oil prices, given “the situation in the Middle East,” will push down corporate profits and household incomes. The economy is expected to continue growing moderately, it said, helped by government measures and private business activity.

But the bank warned that close attention needs to be paid to what happens in the Middle East, foreign exchange and financial markets, as well as “developments in global AI-related demand.”

BOJ Gov. Kazuo Ueda, who has been hospitalized recently, did not attend Tuesday's policy board meeting.

Deputy Gov. Shinichi Uchida, who took his place at the news conference, said prices were generally stabilizing at the bank's 2% inflation target, despite the uncertainties from the war in Iran.

Uchida said Ueda's viewpoints were understood and his absence did not hurt the decision-making.

“I feel sad about his absence, but it did not affect our ability to set policy,” he told reporters, adding that Ueda's hospital stay wasn't expected to be long.

He said that, although currency fluctuations are not a direct focus on the Bank of Japan, the weak yen was being carefully monitored. He also said the central bank will continue to raise rates.

Before the BOJ decision, Tokyo’s benchmark Nikkei 225 index briefly topped 70,000 early Tuesday before giving up some of those early gains and finishing up 0.1%.