Bank of Japan lifts policy rate to 1.25%, a 31-year high, on a 7-2 vote

The Bank of Japan raised its policy rate to around 1.25 percent on Friday, 18 September, the highest setting since April 1995. The Policy Board voted 7-2 to add 25 basis points to the 1.0 percent target set in June. That three-month gap is the shortest interval between hikes under Governor Kazuo Ueda and the shortest since the late-1980s bubble years.

Toichiro Asada voted to keep the rate at about 1 percent. Ayano Sato said the timing was wrong. The new target starts on Thursday, 24 September, after a three-day national holiday that begins on Monday.

Ueda told reporters the bank has entered a different phase of policy. The task is no longer only to confirm that 2 percent inflation can hold. It is to stop prices from running past the target. He did not rule out larger steps or consecutive meetings. That sentence is the part markets will carry into October.

The board said activity and prices are moving with the baseline forecast, and that there is a risk underlying inflation will deviate from 2 percent. Crude prices and a weak yen have lifted import costs. Japanese media put the June-to-September interval in that frame: oil and the currency forced a faster clock than the twice-a-year pace the bank used after it left negative rates in March 2024.

The 1.25 percent setting sits inside the bank’s own estimate of the nominal neutral rate, a band of about 1.1 to 2.5 percent. Once the policy rate is inside that band, each extra hike is a judgment about overheating rather than a catch-up from emergency settings. Takeshi Minami at Norinchukin Research Institute told Kyodo he expects a quarter-point move every three months toward 1.75 percent if inflation in the second half of fiscal 2026 runs hot. Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting put a base terminal rate at 1.5 percent and said 2 percent becomes plausible if the Middle East war pushes energy prices higher still.

Wage data is the other input. Negotiated pay has risen more than 5 percent for a third straight year in 2026. That is the domestic argument for pre-emption. The external argument is the oil price already above the $90-a-barrel level the World Trade Organization has used as a threshold that can shave half a point off global goods-trade growth.

The yen firmed against the dollar on Friday in New York after the bank, acting for the Finance Ministry, ran a “rate check” with commercial banks, a step markets often read as a prelude to intervention. A Japanese government source confirmed the check early Saturday, Tokyo time. The currency move and the rate decision are separate tools. Together they tell the same story: Tokyo is no longer willing to treat a cheap yen as a free export subsidy while household energy bills climb.

The next scheduled meeting is 29-30 October. Between now and then sit the holidays, Typhoon Dujuan’s approach to the Kanto coast, and a week of United Nations speeches in New York. None of those events change the vote count. They can change the inflation print that the board will read in late October.

Ueda’s public line is measured. He has not promised a path. He has said the bank will not wait for an overshoot to become obvious. For a country that spent decades defending zero, that is the shift. The number on the overnight call rate is 1.25 percent. The operational change is the length of the gap between meetings that produce a hike.

Two board members already think the gap is too short. If oil stays elevated and wages keep printing above 5 percent, the minority may shrink in October. If the yen snaps back and energy prices ease, Asada and Sato will have a larger case. The minutes of this meeting, when they appear, will show how far the majority was willing to go beyond the 25 basis points it actually delivered.