Japan’s central bank raised its benchmark interest rate to 1.25% from 1.0% on Friday.

That is the highest level in 31 years.

The Bank of Japan has been trying to normalize monetary policy after decades of keeping rates near or below zero.

Those low rates were meant to encourage borrowing and spending against deflation.

The increase in the uncollateralized overnight call rate, a short-term rate, was expected after the two-day policy board meeting.

Bank of Japan Gov. Kazuo Ueda said the decision considered risks such as the war in Iran, growing demand for artificial intelligence, and currency moves.

He told reporters the Japanese economy is recovering gradually and inflation is close to the 2% target.

Two of the nine board members dissented, citing concerns about the strength of Japan’s growth, according to Ueda.

Analysts have said another increase is possible later this year or early next year.

Ueda stressed that more time is needed to see if price rises stay stable.

He said wage growth and other risks must be watched.

The U.S. Federal Reserve also raised its key rate this week, its first increase since 2023, to fight stubbornly high inflation.

The U.S. has pressured Japan to raise rates over concerns about the weakening yen.

The two nations recently intervened together to support the yen.

Despite the Bank of Japan’s move, the dollar strengthened, briefly reaching above 157 yen.

It had reached above 160 yen earlier this year.

Japan’s inflation is now about the 2% target, though some consumers complain that price surges are too much, especially for gas and oil-related products.

Economist Harumi Taguchi of S&P Global Market Intelligence said that with crude oil prices elevated, the Bank of Japan is expected to raise rates again sooner rather than later.

This would limit the risk that consumer inflation exceeds underlying inflation.

She added that higher rates may weigh on the economy through heavier borrowing costs for small and medium-sized enterprises and higher mortgages.

Analysts are also worried about aggressive public spending promised by Prime Minister Sanae Takaichi’s government, such as tax cuts and defense investments, when public debt is already ballooning.

Tokyo’s benchmark Nikkei 225 rose 1.4% after the decision.