- Decision. The Bank of Japan raised its policy rate by 25 basis points to 1.25% on September 18—the highest level since 1995—in a 7-2 vote, following the US Federal Reserve’s hike two days earlier.
- Inflation. Japan’s headline inflation rate hit 2% in August, matching the BoJ’s longstanding target for the first time in the current tightening cycle, driven partly by oil costs linked to the Iran conflict.
- Yen. The dollar-yen rate stood at roughly 155 at the time of the decision, down from above 160 earlier in 2026 after Tokyo and Washington conducted a coordinated yen-support intervention.
The Bank of Japan voted 7-2 on September 18 to lift its benchmark interest rate by 25 basis points to 1.25%, a level not seen since 1995, according to reporting from Euronews. The two dissenters were board members Toichiro Asada and Ayano Sato, both reflationists appointed by Prime Minister Sanae Takaichi earlier this year, who argued the economy is not yet resilient enough to absorb further tightening.
Why the BoJ moved now
Japan’s core consumer price index rose to approximately 2% in August, matching the central bank’s target after years of sub-target inflation that kept the BoJ the last major central bank to hold rates near zero. The BoJ stated the move was warranted by the risk that inflation could deviate upward beyond 2%, with energy costs elevated by the disruption to oil markets stemming from the US-Iran confrontation in the Persian Gulf. Some Japanese consumers have grown vocal about the burden of rising gas and food prices, adding political pressure to address yen weakness through rate normalisation.
The decision follows a coordinated intervention by Tokyo and Washington to prop up the yen after the exchange rate exceeded 160 yen per dollar earlier in 2026—a level that amplified import inflation for a resource-poor economy. South Korea’s central bank also raised rates back-to-back in August, reflecting a broader pattern of Asian monetary tightening in response to persistent inflation and currency pressure.
Market reaction
Tokyo’s Nikkei 225 benchmark rose following the announcement, with analysts reading the decision as confirmation that the BoJ believes the economic expansion is durable enough to withstand higher borrowing costs. The yen firmed modestly against the dollar. Forward expectations from Bloomberg surveys of BoJ watchers suggest a further hike is possible by January 2027, though the pace remains dependent on whether the yen stabilises and whether the global energy shock from the Iran conflict begins to ease.
The bigger picture
The September 18 decision closes a chapter that saw Japan as the principal outlier among G7 central banks. With the Fed, the ECB, the Bank of England and the Bank of Korea all in active tightening cycles, the BoJ’s first move to 1.25% marks its most confident statement yet that deflation risk has been replaced by a genuine inflation management challenge—one that will test the patience of Japanese households watching their mortgages and business loans reprice upward for the first time in a generation.