The Bank of Japan Just Raised Rates to Their Highest Since 1995

The era of free money in Japan is ending. The Bank of Japan raised its policy rate to 1 percent last week, the highest in over 30 years and the first time it has reached that level since 1995. A weak yen and creeping inflation finally forced the world's most cautious central bank to move, in a 7-to-1 vote.

For decades Japan was the home of near-zero rates. After its 1990s crash, the BOJ kept money almost free to fight deflation, and that cheap yen became a tool global investors borrowed to buy higher-yielding assets everywhere else. Each step away from zero pulls at that long-running setup, which is why a one-point rate matters far beyond Tokyo.

The trigger was the yen and prices. A weak currency made imports more expensive and pushed inflation up, so the BOJ raised rates partly to support the yen and partly to keep prices in check. After the decision the Nikkei climbed, the yen firmed slightly, and bond yields rose, the market reading it as a careful, well-signaled step rather than a shock.

The global angle is the carry trade. Investors have long borrowed cheap yen to buy assets that pay more, from US stocks to bonds, and higher Japanese rates make that trade less profitable and riskier. A gradual unwind is manageable, but a sudden one can force selling across markets, as a sharp yen move did in 2024. Japan's rate path is now a variable everyone watches.

The honest read is that this is measured, not dramatic. One percent is still low by world standards, the hike was widely expected, and the BOJ signaled it would move slowly with maybe one more step this year. The risk is not this decision but the cumulative shift, as years of ultra-easy policy slowly reverse. Small moves add up when they end a 30-year regime.

So Japan is quietly closing the chapter on free money, and the ripples reach far past its borders. A 1 percent rate, the highest since 1995, a firmer yen, and a carry trade under gentle pressure. One of the last anchors of cheap global liquidity is lifting. Watch the yen and Japanese yields for how fast the unwind goes.