The Bank of Japan on Tuesday pushed its benchmark short-term interest rate to 1 per cent, a level unseen since September 1995, marking another deliberate step away from the ultralow rates that defined its monetary policy for decades. The quarter-point increase from 0.75 per cent was approved by a seven-to-one vote at a policy board meeting held in the absence of Governor Kazuo Ueda, who is hospitalised with a liver cyst infection. Deputy Governor Shinichi Uchida, speaking for the governor, signalled that further tightening would follow if economic and price conditions warrant, underscoring the central bank’s determination to normalise policy after years of fighting deflation.

Viewed from Tokyo, the decision reflects a profound shift in Japan’s economic landscape. For much of the past thirty years, the BoJ kept rates near or below zero to stimulate borrowing and escape a corrosive cycle of falling prices. That era ended in March 2024 with the first hike in seventeen years, and Tuesday’s move—the first since December 2025—cements a trajectory that aligns Japan more closely with global peers. Yet the 1 per cent rate remains far below the European Central Bank’s main refinancing rate, which was lifted last week to a range of 2.25 to 2.65 per cent, and the tightening expected from the US Federal Reserve later this week. Analysts in London note that the BoJ’s cautious pace reflects both the legacy of deflationary psychology and the fragility of an economy still absorbing the shock of elevated energy costs.

The immediate trigger for the hike is the inflationary fallout from the war in Iran, which has sent crude oil prices soaring and squeezed import-dependent Japan. Even as Washington and Tehran agreed the outline of a peace deal, officials in Tokyo warned that companies are passing on higher energy costs at a “relatively fast pace” and that medium- to long-term inflation expectations continue to rise. The yen’s persistent weakness against the dollar has amplified these pressures by making imports more expensive. In a sign of the complex cross-currents, Japan’s annual core inflation fell to a four-year low of 1.4 per cent in April, yet the BoJ judges that underlying inflation risks breaching its 2 per cent target.

From the Middle East, the conflict’s economic ripples are being felt far beyond the Strait of Hormuz. European and Southeast Asian central banks have already tightened policy in response, and the BoJ’s move places it within a broader global cycle of monetary restriction. The bank also announced it would slow the pace of reductions in its government bond purchases from next April, maintaining the current rhythm of trimming holdings by roughly 200 billion yen every three months until March, a calibrated attempt to avoid a disorderly rise in long-term yields.

Looking ahead, Deputy Governor Uchida struck a cautiously optimistic note, observing that the risk of a severe economic downturn has diminished as Japanese firms secure alternative sources of raw materials. Nevertheless, he made clear that the BoJ stands ready to raise rates further if inflation proves stickier than anticipated. Financial markets absorbed the decision with equanimity: the Nikkei 225 index breached 70,000 points for the first time, while the yen failed to strengthen against the dollar, suggesting investors had fully priced in the move. The question now is whether the BoJ can sustain its tightening path without choking off a recovery that remains vulnerable to geopolitical shocks and the uncertain pace of global demand.