Bank of Japan lifts the policy rate to 1.25 percent, the highest since 1995

The Bank of Japan raised its uncollateralized overnight call rate by 0.25 percentage points to around 1.25 percent on Friday, 18 September, the first time the official policy rate has stood at that level since April 1995.

The nine-member Policy Board voted 7-2 at the close of a two-day meeting. Toichiro Asada wanted the rate left at about 1 percent. Ayano Sato said the timing was wrong. The new target takes effect on Thursday next week because Monday through Wednesday are national holidays in Japan.

It was the first increase in three months and the sixth since the bank ended its decade of ultra-easy policy in 2024. Under Governor Kazuo Ueda, who took office in 2023, the gap between hikes had been closer to six months. A three-month interval last appeared during the late-1980s bubble.

Why the board moved now

The bank said underlying inflation is approaching its 2 percent target and that financial conditions remain accommodative. In the statement it pledged to “continue to raise the policy interest rate and adjust the degree of monetary accommodation” as activity and prices develop.

Energy is the immediate pressure. Crude prices have risen with fighting around the Strait of Hormuz and the wider war involving Iran. A weak yen has made imported fuel and food more expensive. Core consumer inflation in August stayed near the 2 percent mark as firms passed on grocery costs.

At his afternoon news conference Ueda put the shift in plain language. With underlying inflation near 2 percent, he said, the bank’s policy focus had changed. “If risks of underlying inflation overshooting 2 percent materialise, that could have a negative impact on Japan’s economy.”

Demographics add a slower force. Executive Director Koji Nakamura said earlier in the week that a shrinking labour pool is lifting wages and that this cannot be treated as a passing shock. Companies have been raising pay to hold staff. That feeds into prices even when oil is quiet.

The yen did not jump

Markets had priced the 25-basis-point step. The yen still slipped toward 156.91 per dollar after the vote because two members dissented and the guidance did not promise a faster path. Investors wanted a clearer signal that the next hike would come this winter. They did not get one.

The Federal Reserve raised rates on Wednesday. Another US move later this year would widen the gap with Tokyo and put fresh downward pressure on the yen. That, in turn, would lift import prices. The European Central Bank took its key rate to 2.5 percent last week. Japan remains the cheap end of the major-currency set.

The bank now places Japan’s nominal neutral rate in a range of about 1.1 to 2.5 percent. Friday’s decision puts the official rate inside that band. How far Ueda is willing to go inside it is the question markets will trade for the rest of the year.

What changes for households and firms

Mortgage rates that track the policy rate will start to move after the holiday week. Banks have already been repricing some products after the June hike. Deposit rates have risen more slowly. Households that hold large cash balances at near-zero yields will see a modest lift. Borrowers on floating-rate home loans will not.

For exporters the picture is mixed. A weaker yen after the announcement helps yen revenues from overseas sales. Higher domestic funding costs cut the other way. Global carry trades that used the yen as a funding currency have been unwinding in stages since 2024. Another 25 basis points does not end that trade, but it raises the cost of keeping it on.

The government has been watching food prices. Rice, fruit and imported meat have all featured in political argument this year. A higher policy rate will not cut those prices in the next quarter. It is meant to stop them from settling at a permanently higher pace.

The dissenters and the next date

Asada and Sato are now on the record against the faster cadence. Split votes have become more common as the board leaves emergency settings. Ueda still has a clear majority. He also has a calendar. The next scheduled meeting sits after the holidays. Some market desks expect another hike in December or January if oil stays high and wages keep rising.

The political backdrop is quieter than it was when the bank first exited negative rates. The Ministry of Finance has not publicly pressed Ueda to hold back. Washington has, in other forums, asked Tokyo to let the yen strengthen. Friday’s decision answers the inflation brief first.

What remains open is whether 1.25 percent is a way-station or a plateau. Ueda declined to close that question. He tied future moves to data on prices, wages and the external shock from energy. The board will meet again with those numbers on the table, and with two colleagues already arguing that this step came too soon.