The Bank of Japan (BoJ) has raised its short-term policy interest rate to “about 1%”, lifting borrowing costs to their highest level in 31 years as the country seeks to adapt to a persistent inflationary environment.

The 0.25 percentage point increase, which was widely anticipated by financial markets, brings Japan to what analysts view as a critical milestone in the central bank’s efforts to normalize monetary policy after decades of ultra-low interest rates and deflation.

The BoJ’s policy rate was last at the 1% level in 1995. At that time, the central bank was in the process of cutting borrowing costs following the collapse of the Japanese asset price bubble in the late 1980s.

In its accompanying statement, the BoJ signaled its intention to continue the normalization process, stating it would adjust the policy rate and the degree of monetary easing in accordance with developments in economic activity, prices, and financial conditions.

The BoJ also announced that it will halt the reduction of its monthly Japanese government bond purchases starting in April 2027, stabilizing the pace of purchases at approximately 2 trillion yen per month. This move was also largely expected by the market.

Following the announcement, the yen traded flat against the US dollar at approximately 160.2.

While noting that high crude oil prices continue to weigh on economic activity, the BoJ stated that “the risk of a significant slowdown in the economy appears to have diminished compared to some time ago.”

The central bank also observed that the pass-through of high fuel prices has progressed relatively quickly, spreading from business-to-business transactions to consumer prices, which could keep core consumer inflation above its 2% target.

Having exited negative interest rates in 2024, the BoJ raised rates twice in 2025. The bank is widely expected to settle into a pattern of gradual tightening roughly every six months. Some economists believe another 0.25 percentage point hike could come as early as October.

This week’s rate decision was approved by a 7-to-1 vote on the bank’s Policy Board. The board convened with eight members due to Governor Kazuo Ueda’s hospitalization last week.

Toichiro Asada, the sole dissenting member, argued that the situation in the Middle East poses downside risks to production and employment for Japan, rather than upside risks to prices.

“The vote distribution is interesting and suggests the board has become a bit more balanced; previously, the board had a noticeably hawkish tilt,” said Stefan Angrick, senior economist and head of Japan at Moody’s Analytics.

Speaking to the Financial Times, Angrick added: “The reality is that the BoJ has no good options. They can raise rates to strengthen the yen and reduce inflationary pressure, but that hurts the economy.”

Ueda, who is receiving treatment for a liver condition, did not attend the meeting and did not cast a vote. He is expected to return for the July meeting. This week’s meeting was chaired by BoJ Deputy Governor Ryozo Himino.

The afternoon press conference will be led by the bank’s other deputy governor, Shinichi Uchida. Uchida’s remarks will be closely monitored for indications of how the BoJ continues to assess the adverse economic impacts of the war involving Iran.

China’s factory-gate prices recorded their fastest increase in nearly four years last month, official data released on Wednesday showed, highlighting the impact of rising energy prices following the conflict in Iran on the world’s second-largest economy.

According to figures published by China’s National Bureau of Statistics, the producer price index (PPI) rose 3.9% in May from a year earlier. The increase was the strongest since July 2022 and marked the third consecutive month of expansion.

The index returned to positive territory in March after years of decline. The turnaround came shortly after the outbreak of the US-Israel war in Iran, which sharply reduced oil and gas shipments through the Strait of Hormuz.

Lynn Song, ING’s chief economist for Greater China, noted that prices in the oil and gas extraction sectors rose by 36%.

“The Iran war has clearly accelerated the return to positive PPI inflation that had previously been expected to be more gradual,” Song said.

The United States and Israel launched new attacks on Iran this week, further complicating President Donald Trump’s efforts to extend the ceasefire reached in April and restore energy flows through the strait.

Abhijit Surya, senior APAC economist at Capital Economics, said the May data showed that “the ripple effects of the Middle East supply shock are still being felt,” although he added that consumer price inflation was “showing signs of easing.”

China’s consumer price inflation rose 1.2% year-on-year in May, unchanged from the previous month.

On a monthly basis, however, consumer prices fell 0.1%, underscoring persistent demand pressures in an economy where policymakers continue to grapple with a prolonged property-market slowdown and intense domestic competition.

Beijing remains heavily reliant on trade to support economic growth as it confronts weak consumer and household confidence alongside stagnation in the real estate sector.

Fresh data released on Tuesday showed exports rose 19.4% in May. Shipments to the United States surged compared with the same period last year, shortly after the launch of President Trump’s tariff campaign, which has so far failed to curb China’s export machine.

Song also pointed to a 9.2% increase in raw material prices, saying the figure appeared poised to move into double-digit territory.

“This is likely to feed through to other prices in the coming months because many manufacturers operating with thin margins will have little choice but to pass these costs on to consumers,” he said.

On a monthly basis, producer prices rose 0.5% in May.

China has set an official consumer inflation target of 2% for 2026, while its GDP growth target stands at between 4.5% and 5%.

The Pentagon has designated dozens of Chinese companies, including Alibaba, BYD, Baidu, Unitree, Huawei, and CXMT, as entities with alleged links to the Chinese military.

The move signals an intensifying effort by Washington to broaden the definition of “dual-use technologies” amid heightened national security concerns.

In an updated Section 1260H list released Monday evening, the US Department of Defense (DoD) asserted that these Chinese corporations were found to be supporting the modernization and strengthening of the People’s Liberation Army, despite operating directly or indirectly within the US.

The newly listed entities represent a wide spectrum of technological sectors, including artificial intelligence, semiconductors, autonomous systems, unmanned aerial vehicles, robotics, and battery technology.

A previous version of the list had been briefly published in February before being withdrawn, after it was discovered that memory chip manufacturers ChangXin Memory Technologies (CXMT) and Yangtze Memory Technologies (YMTC) had been mistakenly omitted.

The term “dual-use” refers to technologies that have both civilian and military applications.

While inclusion on the 1260H list does not trigger automatic sanctions, it can result in restrictions on US government procurement, trigger investment reviews, and pose significant reputational or regulatory risks for the affected companies.

Major Chinese firms, including Tencent and CATL, were added to the same 1260H list in January 2025.

Following the latest announcement, American depositary receipts for both Baidu and Alibaba saw slight declines in New York trading, while their shares in Hong Kong remained largely flat on Tuesday.

Winston Ma, an adjunct associate professor at NYU School of Law, told Nikkei Asia that the inclusion of companies like Alibaba, Baidu, BYD, Tencent, and Xiaomi indicates a major expansion of what is considered strategic technology through a national security lens.

Ma noted that the updated Pentagon list aligns with earlier moves by the Committee on Foreign Investment in the United States (CFIUS) to broaden its scope for reviewing commercial mergers and acquisitions.

That expansion, which occurred in early 2025, was aimed at restricting investments from geopolitical rivals, specifically China.

“Both developments reflect a broader reality: the boundary between commercial technology and national security is becoming increasingly blurred,” Ma said.

The updated list was released less than a month after President Donald Trump met with President Xi Jinping in Beijing.

The two leaders secured a fragile ceasefire in the ongoing trade war, leading some analysts to speculate that the administration may have delayed the list’s release until after the summit.

Alibaba and other companies named in the update have pledged to challenge their inclusion.

“There is no basis for concluding that Alibaba should be included on the 1260H List,” an Alibaba spokesperson said. “Alibaba is not a Chinese military company and is not part of any military-civil fusion strategy. We will pursue all legal avenues to contest attempts to mischaracterize our company.”

Baidu also contested its inclusion in a statement to Nikkei Asia. “There is no credible justification for Baidu’s addition to the list. The claim that Baidu is a military company is entirely without merit. We will not hesitate to use all available options to seek the company’s removal from the list,” a Baidu spokesperson stated.

Since Trump returned to power in January 2025, the US has significantly expanded restrictions on Chinese companies through various blacklists and regulatory frameworks, targeting a wider range of sectors even as China’s AI and biotechnology firms continue to advance.

In contrast to the Pentagon’s list, the Bureau of Industry and Security’s (BIS) Entity List carries more immediate consequences by restricting a company’s access to US technology and mandating export licenses.

According to a report by the Center for a New American Security, 95 Chinese entities were added to the Entity List last year, approximately two-thirds of which were linked to China’s military modernization.

Last year, the BIS expanded export controls by introducing the “Affiliated Entities Rule,” which extended licensing restrictions to non-listed foreign affiliates where blacklisted entities hold a 50% or greater stake.

However, the enforcement of that rule is currently suspended.