The Bank of Japan raised its short-term policy rate by 0.25 percentage points to 1.25% on September 18. It is the highest level since 1995 and another step away from decades of ultra-loose monetary policy.
The decision passed by a 7-2 vote, and the new rate takes effect on September 24. The divided board drew as much attention from investors as the hike itself.
Why the BoJ moved
The central bank pointed to stubborn inflation. It now expects core consumer prices, which exclude fresh food, to run “clearly above” its 2% target from the second half of fiscal 2026.
Policymakers listed several reasons for acting:
- Medium- and long-term inflation expectations are rising.
- Real interest rates remain deeply negative even after the hike.
- Higher costs are being passed on to consumers more consistently.
- Energy prices have climbed sharply since conflict in the Gulf disrupted oil shipments earlier this year.
The bank kept language from its July statement that stabilising underlying inflation “at a level around 2 percent” has become important.
A split board
Two members dissented. Their opposition suggests further hikes will not be automatic and may require stronger evidence that wages and prices are rising together.
Market reaction
The yen weakened after the announcement as traders focused on the split vote rather than the hike. A softer yen raises import costs, which could add to the inflation pressure the BoJ is trying to contain.
Japanese government bond yields have climbed throughout 2026 as the bank shrinks its bond purchases and lifts rates. Higher yields raise borrowing costs for a government that carries one of the world’s largest public debt loads.
The political backdrop
The decision came shortly after Prime Minister Sanae Takaichi reshuffled her cabinet and pledged to prioritise growth. Takaichi has long favoured supportive fiscal and monetary policy, and markets will watch for any sign of friction between the government and the central bank.
What it means for households and businesses
- Borrowers: Variable-rate mortgages, which most Japanese homeowners hold, will gradually become more expensive.
- Savers: Banks are likely to raise deposit rates, which were close to zero for most of the past three decades.
- Companies: Firms that relied on cheap financing face higher costs, but exporters may benefit if the yen stays weak.
What comes next
The BoJ’s next policy meeting is scheduled for late October, when it will also release updated growth and inflation forecasts. Most analysts expect a pause, but persistent inflation could keep another hike on the table by early 2027.
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