Bank of Japan hikes rates to 1.25%, highest since 1995, amid global tightening

Key points

• The Bank of Japan raised its main interest rate from 1% to 1.25%, the highest level since 1995.
• The rate hike was a 25-basis point increase, accelerating the pace of tightening since March 2024.
• The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting.
• Japan's core inflation eased slightly to 1.7% in August but remains close to the BOJ's 2% target.
• The yen weakened to 156.64 per dollar after the announcement, despite the rate hike.
• The BOJ cited risks of inflation deviating upward beyond its 2% target as the reason for the hike.

Background

Japan has been gradually raising interest rates since 2024, when the rate stood at minus 0.1%. This marks the sixth hike in two and a half years, as the BOJ moves away from decades of ultra-low borrowing costs. The country has experienced low inflation or deflation for around three decades, making current price rises a relatively new development. The recent rate hikes are part of a global trend, with the US Federal Reserve and European Central Bank also raising rates in September 2026 to combat inflation driven by higher energy prices from the Iran war. Japan is particularly vulnerable to energy supply disruptions due to its reliance on Middle Eastern energy, and the weak yen has added to economic pressures. The BOJ's actions are also influenced by external pressure from the US, with Treasury Secretary Scott Bessent urging the BOJ to take decisive steps to support the yen.

How outlets are covering it

The BBC and CNBC both report on the BOJ's rate hike to 1.25%, highlighting it as a 31-year high. However, they differ in their emphasis on the dissenting votes. CNBC notes that the decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting, while the BBC does not mention the dissent. CNBC also provides more detail on the dissenters' reasoning, noting that Asada and Sato believed the economic situation was not strong enough to justify the hike, whereas the BBC focuses on the broader context of global rate hikes and the impact on the yen. Both sources agree that the hike was widely expected, with CNBC noting that almost 90% of economists surveyed predicted the 25-basis point increase. The BBC emphasizes the impact of the Iran war on energy prices and inflation, while CNBC focuses more on the BOJ's internal decision-making process and the dissenting votes.

Why it matters

The BOJ's rate hike signals a shift in Japan's monetary policy, moving away from decades of ultra-low borrowing costs. This could have significant implications for the Japanese economy, including stronger currency, higher borrowing costs, and potential impacts on inflation and economic growth. The move also reflects a global trend of central banks tightening monetary policy to combat inflation, driven by energy disruptions and other factors. The dissenting votes within the BOJ highlight internal disagreements about the pace and timing of rate hikes, which could affect future monetary policy decisions. The weak yen and rising inflation remain key challenges for Japan, and the BOJ's actions will be closely watched as they navigate these economic pressures.

What to watch

The BOJ is expected to continue monitoring inflation and economic conditions as it decides on future rate hikes. The dissenting votes suggest that there may be further debate within the BOJ about the pace of tightening. The yen's reaction to the rate hike, with a slight weakening, indicates that market expectations may not have fully priced in the impact of the hike. The BOJ may need to take further action if inflation continues to rise or if the yen remains weak. The US and other major economies will also be watching Japan's monetary policy, as it could have implications for global financial markets and trade relationships. The BOJ's next move will likely depend on inflation data and economic indicators, with the possibility of further rate hikes if inflation deviates upward beyond the 2% target.