Japan's central bank pushed its benchmark interest rate to its highest level in three decades on Friday, part of a gradual campaign to normalize policy after years of near-zero rates.
The Bank of Japan lifted its policy rate to 1.25 percent, the highest since 1995. The move follows a period in which Japanese wages have risen more than 5 percent for a third consecutive year, according to Kyodo News, a stretch of sustained pay growth that has allowed savers to earn meaningfully positive returns on deposits for the first time in decades. Japan's three largest banks, Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho, are set to raise the rate they pay on ordinary deposits to 0.5 percent from November 2, up from 0.4 percent, according to Jiji Press.
Economists in Tokyo describe the central bank as settling into a predictable rhythm rather than reacting sharply to short-term data. Takeshi Minami of the Norinchukin Research Institute told Kyodo News he expects the bank to continue raising rates by a quarter point roughly every three months, working toward a policy rate near 1.75 percent. Even so, the yen has continued to weaken, falling more than 2 percent against the dollar over the past week to around 157, and traders are watching closely as it approaches the 160 level that has previously drawn government intervention.
Tokyo's markets will be closed from September 21 to 23 for a run of public holidays, and a currency dealer at a Japanese bank told Nikkei that concerns about possible currency intervention tend to build quickly during thin holiday trading. The rate increase came in the same week that the U.S. Federal Reserve raised its own benchmark rate for the first time since 2023, putting two of the world's most closely watched central banks on tightening paths at the same time.
Traders will watch how the yen behaves during this week's Tokyo market holiday, when thin trading has historically amplified currency moves.
Why is the yen weakening even as Japan raises rates?
The yen has moved largely in tandem with rising U.S. Treasury yields and a broadly stronger dollar, even as the Bank of Japan continues its own gradual rate increases.
How high could Japanese rates go?
One closely watched economist told Kyodo News he expects the Bank of Japan to keep raising rates by a quarter point roughly every three months, working toward around 1.75 percent.