The Bank of Japan (BoJ) has done something that sounds dramatic - raising interest rates to a 31-year high - until you realize that 'high' here means a cool 1%. Yes, in a move to combat inflationary pressures sparked by the Iran war, Tokyo policymakers bumped the short-term policy rate by a quarter point, from 0.75% to 1%. That's right: Japan's economy is now officially in territory that would have seemed quaintly low in most other decades.
The BoJ warned that companies are passing on rising oil costs to each other at a 'relatively fast pace,' which is central bank speak for 'everyone's feeling the pinch.' They decided to tighten monetary policy despite a recent dip in oil prices - thanks to Washington and Tehran agreeing on the basic structure of a peace deal - and despite Japan's annual core inflation having fallen to a four-year low of 1.4% in April. Because nothing says 'let's fight inflation' like raising rates when inflation is already dropping.
Governor Shinichi Uchida told a press conference that the US-Iran memorandum to end the Middle East conflict was 'a welcome move,' but hedged his bets on how quickly oil supplies would actually increase. 'Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished,' he said, before adding that price rises are broadening and underlying inflation might stray from the BoJ's target. 'With underlying inflation approaching 2%, it's important to ensure we achieve our target stably,' he added, in a statement that could double as a self-help mantra for central bankers.
The rate rise pushes Japan's borrowing costs to their highest since 1995, when the BoJ was busy slashing rates after a property and asset bubble burst. For context, in 1973 the BoJ raised rates to a staggering 9% to combat the Opec oil embargo, and by 2016 it was implementing negative interest rates to drag Japan out of a deflationary slump. History, it seems, is a see-saw with very small numbers.
Susannah Streeter of Wealth Club called the move 'a step-change in monetary policy,' noting that even a 50-basis-point hike had been mooted. 'There was some relief that the move wasn't more hawkish,' she said, which is the financial equivalent of being grateful you only stubbed your toe instead of breaking it.
Meanwhile, Tokyo's stock market closed at a new record high, with the Nikkei hitting 70,000 points for the first time - soaring by a third this year. Because apparently, while borrowing gets slightly more expensive, investors are too busy celebrating to care. The BoJ is the second G7 bank to raise rates since the Iran war began, following the European Central Bank. The US Federal Reserve and Bank of England, ever the cautious types, are expected to keep rates unchanged this week.