Japan's central bank, the Bank of Japan (BOJ), has increased its benchmark interest rate to 1.25%, the highest level in 31 years. This marks the first time the rate has reached this level since 1995. The BOJ has been gradually raising its policy rate since 2024, when it was set at a negative 0.1%, and has now raised it six times over the past two and a half years. The latest increase was announced on Friday after a two-day meeting of the monetary policy board and was widely expected by financial markets. This move follows a similar rate hike by the U.S. Federal Reserve, adding to pressure on Japan to adopt tighter monetary policies. The BOJ's decision comes amid growing concerns over Japan's economic challenges. These include a weak yen, which has been losing value against other major currencies, rising prices, and a shrinking workforce. Recent data showed that Japan's core inflation rate, which excludes volatile food and energy prices, fell slightly to 1.7% in August from 1.8% the previous month. However, this rate is still close to the BOJ's 2% inflation target. While Japan's inflation rate is relatively low compared to other developed countries, it represents a significant shift, as the nation had experienced very low inflation or even deflation for nearly three decades. Global oil and gas prices have risen this year due to conflicts in the Middle East, particularly the war in Iran, which has disrupted shipping through the Strait of Hormuz. Japan, which relies heavily on energy imports from the region, is especially affected by these supply interruptions. The yen has also faced downward pressure in recent months, prompting a rare joint intervention by Japan and the United States earlier this year to prevent it from falling to a 40-year low. This was the first such coordinated effort since 2011, when both countries worked to weaken the yen after the Tohoku earthquake and tsunami. The U.S. has continued to urge the BOJ to raise interest rates to support the yen, with Treasury Secretary Scott Bessent recently encouraging BOJ Governor Kazuo Ueda to "do the right thing." As of now, the U.S. dollar is trading at around 155 yen.