Bank of Japan raises benchmark interest rate to 1.25%, highest level since 1995

The Bank of Japan hiked its policy interest rate by 25 basis points to 1.25% on September 18, pushing borrowing costs to their highest level since April 1995.

The decision passed with a 7-2 vote under Governor Kazuo Ueda, who framed the move as a necessary response to inflation pressures that refuse to cooperate with polite requests to calm down. Rising global energy prices, a stubbornly weak yen, and broader tightening cycles from central banks around the world all factored into the BOJ’s calculus.

What drove the decision

This latest hike came just three months after the BOJ raised rates to 1% in June 2026. That previous increase was itself a milestone, marking the first time Japan’s policy rate had crossed the 1% threshold in decades.

The primary catalyst: inflation that continues to run hotter than the BOJ would like. Global energy costs, exacerbated by Iran-related conflicts in the Middle East, have pushed consumer prices higher. A weak yen compounds the problem by making imports more expensive, which feeds directly into the cost of everything from gasoline to groceries for Japanese households.

Ueda emphasized the central bank’s commitment to stabilizing inflation near its 2% target, while signaling that future decisions would remain data-dependent.

Not everyone on the board agreed with the timing. Toichiro Asada voted to hold rates steady at 1%, while Ayano Sato argued the timing was inappropriate.

Markets react with skepticism

If the BOJ hoped a rate hike would strengthen the yen, the currency had other plans. The yen weakened to approximately 157 per dollar following the announcement.

Even at 1.25%, Japan’s benchmark rate sits well below those of the Federal Reserve and the European Central Bank. That differential continues to make the yen a funding currency for carry trades, where investors borrow in yen to invest in higher-yielding assets elsewhere.