The Bank of Japan raised interest rates to a 31-year high on July 16 as it sought to contain inflation driven by the recent Middle East conflict, despite a peace agreement between Washington and Tehran, AFP reports.

The central bank increased its benchmark rate by 25 basis points to 1.0%, the highest level since 1995. It was the first rate rise since December, 2025.

The move had been widely anticipated and followed rate increases by the European Central Bank and Indonesia’s central bank last week after the conflict fuelled higher prices and economic disruption worldwide.

With US inflation at a three-year high, expectations are growing that the Federal Reserve could also tighten policy, although such a move is not expected at its first policy meeting under new chair Kevin Warsh this week.

The Bank of Japan said that while higher crude oil prices had weighed on economic activity, the economy continued to be supported by strong corporate profits and improvements in employment and incomes.

Consumer price inflation has remained below the central bank’s 2% target, helped in part by government energy subsidies.

However, the bank said the pass-through of higher crude oil prices had accelerated in business-to-business transactions and could spread more broadly to consumer prices.

It warned that rising medium- and long-term inflation expectations increased the risk that underlying consumer price inflation could exceed its 2% price stability target.

The Bank of Japan said it would continue to raise policy rates and adjust the degree of monetary accommodation.

It added that decisions on the timing and pace of further tightening would depend on developments in the Middle East and their impact on Japan’s economy and prices.