Bank of Japan Raises Rate to 1.25%, a 31-Year High, in 7-2 Vote

The Bank of Japan raised its policy rate by 25 basis points on 18 September 2026, lifting the uncollateralised overnight call rate to around 1.25% from 1.0%. That is the highest level since 1995. The central bank's own statement records the decision as a 7-2 majority of the nine-member Policy Board, with the new guideline taking effect on 24 September. The basic loan rate moves to 1.5%.

The bank set out its reasoning in the statement: it sees a risk that underlying consumer inflation "will deviate upward to a level above the price stability target of 2 percent", pointing to firms shifting further towards raising both wages and prices. Consumer prices excluding fresh food have been running in a 1.5-2.0% range, and the BoJ expects that rate to move clearly above 2% from the second half of fiscal 2026. CNBC put August headline inflation at 1.9% and the core reading at 1.7%, down from 1.8% in July. Al Jazeera notes this was the first hike since June; it landed two days after the US Federal Reserve raised its own key rate for the first time since 2023, according to AP.

The two dissents are the detail markets seized on. Board members Toichiro Asada and Ayano Sato voted against. The BoJ's published record says Asada argued that with core CPI below 2%, "it could not necessarily be said that the economic situation was strong", while Sato judged that current economic and price developments "did not appear to have substantially accelerated" compared with before. CNBC reported that both were appointed by Prime Minister Sanae Takaichi's government earlier this year; the broker XTB dates the appointments to March.

That split blunted the hawkish signal, and the yen fell rather than rose. CNBC put the dollar at 156.64 yen shortly after the decision, a 0.45% move against the Japanese currency; AP said the dollar momentarily traded above 157 yen. XTB quoted USD/JPY at 157.23 at 07:14 CEST, the pair's highest since early September, and described classic "buy the rumour, sell the fact" profit-taking. XTB's analyst Michal Jozwiak wrote that Governor Kazuo Ueda's press conference initially pulled the pair back before the yen lost its footing again. AP reported the Nikkei 225 rose 1.4% after the announcement.

For households and companies in Japan, the cost of money is now the highest in a generation. Harumi Taguchi, an economist at S&P Global Market Intelligence, told AP that higher rates will weigh on the economy through heavier borrowing costs for small and medium-sized firms and higher mortgages, while still expecting a further hike "sooner rather than later".

What comes next is deliberately open. The BoJ says it will continue raising the policy rate but named no date, and Ueda said there is no preset pace, with each meeting judged on the data. The bank listed the situation in the Middle East, expanding AI-related demand and exchange-rate moves as the risks it is watching.

This article is for information purposes only and is not investment advice.