Japan’s central bank raised its main interest rate on Friday.

The rate went up to 1.25% from 1.0%.

This is the highest level in 31 years.

The Bank of Japan has tried to normalize monetary policy.

For many years, it kept rates near or below zero.

Those low rates were meant to encourage borrowing and spending.

They were also meant to fight deflation.

The increase was in the uncollateralized overnight call rate.

This is a short-term rate.

The rise was expected after the two-day policy board meeting.

Bank of Japan Gov. Kazuo Ueda said the decision considered several risks.

These include the war in Iran, growing demand for artificial intelligence, and currency moves.

He told reporters the Japanese economy is recovering slowly.

He also said inflation is close to the 2% target.

Two of the nine board members disagreed.

They were worried 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.

He wants 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.

It was its first increase since 2023, to fight high inflation.

The U.S. has pressured Japan to raise rates.

It is worried about the weakening yen.

The two nations recently intervened together to support the yen.

Despite the Bank of Japan’s move, the dollar strengthened.

It briefly reached above 157 yen.

It had reached above 160 yen earlier this year.

Japan’s inflation is now about the 2% target.

However, some consumers complain that price surges are too much.

This is especially true for gas and oil-related products.

Economist Harumi Taguchi of S&P Global Market Intelligence said crude oil prices are high.

She said the Bank of Japan is expected to raise rates again sooner rather than later.

This would limit the risk that consumer inflation goes above underlying inflation.

She added that higher rates may hurt the economy.

Borrowing costs will be heavier for small and medium-sized enterprises.

Mortgages will also be higher.

Analysts are also worried about public spending promised by Prime Minister Sanae Takaichi’s government.

This includes tax cuts and defense investments.

Public debt is already growing fast.

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