The Bank of Japan has pushed interest rates up to 1.25 percent, the highest level since 1995, in a bid to cool inflation driven by expensive energy imports and a sinking currency. The 25-basis-point move, approved by a 7-2 vote on Friday, was widely expected after recent hikes from the US Federal Reserve and the European Central Bank — and officials signalled more increases are coming as underlying inflation edges toward the bank's two percent target.
For anyone with a trip to Japan on the horizon, the more interesting number is the exchange rate. Despite the hike, the yen actually slipped after the announcement, trading above 157 to the dollar. It hit a 40-year low in July, forcing a rare joint currency intervention by Tokyo and Washington. That's because Japanese rates remain far below America's, so investors keep parking money in higher-yielding dollar assets. For travellers, this decades-weak yen means hotels, meals and rail passes in Japan keep costing notably less in foreign currency than they did a few years ago — often the difference between a splurge and a bargain.
The catch is that the same forces squeezing the yen are pushing up prices inside Japan. Imported energy has become pricier since the Middle East crisis sent oil and gas costs climbing, and Capital Economics economist Marcel Thieliant expects inflation to breach the BOJ's two percent target soon. August's core inflation reading of 1.7 percent looked tame, but only thanks to government subsidies on gasoline and electricity.
That government support is worth knowing about if you're planning further ahead. Alongside a large stimulus package from late 2025 and spring measures to boost consumer spending, Japan's cabinet has approved a dramatic two-year cut to the consumption tax on food — dropping it from eight percent to one percent from April 2027. If it goes ahead, eating out and grocery shopping in Japan will get even cheaper during that window, a rare boost for visitors whose restaurant bills include that tax.
So the picture for travellers is mixed but mostly friendly: a currency that stays soft against the dollar, euro and pound, modest official inflation, and tax relief on food on the horizon. The main risk is timing — if the BOJ keeps hiking and the gap with US rates narrows, the yen could firm up, quietly making your Tokyo hotel or Kyoto ryokan more expensive in your home currency. Anyone considering a Japan trip in the next year or two is arguably better off going sooner rather than later, while the weak-yen window is still open. Pair that with the country's world-class food scene, efficient trains and a strong exchange for your money, and Japan remains one of the better-value big trips out there right now.