Bank of Japan lifts its policy rate to 1.25 percent, a 31-year high

The Bank of Japan raised its uncollateralized overnight call rate by 25 basis points to 1.25 percent on Friday, the highest official rate since 1995. The Policy Board voted 7-2 after a two-day meeting. Board members Toichiro Asada and Ayano Sato voted against the increase. Governor Kazuo Ueda was due to brief the press at 3:30 p.m. Tokyo time.

The statement said the risk was that inflation would run above the 2 percent target, driven by import costs and energy. Japan's headline rate for August was 1.9 percent. Core consumer inflation stayed near the target as firms kept passing through food and grocery costs. Executive Director Koji Nakamura said earlier in the week that a shrinking labour force was lifting wages in a way the bank could not treat as a one-off.

Friday's step is the second hike in three months and a faster cadence than the six-month gaps that followed the end of negative rates in March 2024. All economists in a Bloomberg survey had expected 1.25 percent. A Reuters poll had the same call, then 1.5 percent by March 2027 and 1.75 percent in the second quarter of that year. Most of those economists put the terminal rate at 1.75 percent or higher. The bank's own estimate of the nominal neutral rate sits between 1.1 and 2.5 percent, so 1.25 percent is inside that band for the first time.

Washington has been unusually direct. Treasury Secretary Scott Bessent publicly urged Tokyo to tighten faster to support the yen. The Fed's own quarter-point rise on Wednesday, and the chance of another before December, widens the US-Japan gap if Ueda pauses. A wider gap tends to weaken the yen and raise the yen price of oil and food. After the decision USD/JPY moved to about 156.70 from 156.20 on some feeds, even as other desks saw a short-lived yen bid. The 10-year Japanese government bond yield was reported near 2.95 percent.

For three decades the yen was the cheap funding currency for global carry trades. Each step toward 1.25 percent raises the cost of borrowing yen to buy higher-yielding assets elsewhere. Bitcoin's dollar price printed above $77,000 in the same window, a move traders tied to yen volatility as much as to any Japanese demand for crypto. The European Central Bank is already at 2.5 percent. Relative to Frankfurt and Washington, Tokyo is still the low-rate centre. Relative to its own history, it is not.

Ueda has avoided a public terminal-rate number. Analysts doubt he will give one on Friday. What the board did give is a shorter gap between hikes and a 7-2 split that shows the dissenters think the bank is moving too fast for the data. The majority thinks the risk runs the other way: energy, a weak yen, and wage growth that no longer looks temporary. The next meeting will show which side the incoming prices favour.