The Bank of Japan has raised its policy rate by 25 basis points to 1.25%, taking borrowing costs to their highest level since 1995. The move marks a faster pace in the central bank’s tightening cycle, which began in March 2024 as part of its monetary policy normalization.
The decision was split 7-2. Board members Toichiro Asada and Ayano Sato voted against the increase. Both were appointed earlier this year by Prime Minister Sanae Takaichi and are widely viewed as favoring a more reflationary stance.
In its statement, the BOJ said it acted because of the risk that inflation could move higher and rise beyond its 2% target. The central bank added that it wants to stabilize underlying inflation at “around 2%” so that price growth does not overshoot its goal and later harm the Japanese economy.
The move had been broadly expected by markets. Nearly 90% of economists surveyed by CNBC had forecast a 25-basis-point increase, and the survey also correctly identified the dissenters.
The rate hike comes as inflation remains elevated and the yen stays historically weak. Japan’s headline inflation rate for August stood at 1.9%, while Tokyo and Washington have been carrying out coordinated intervention to support the currency.
After the decision, the yen traded at 156.64, down 0.45%, while the benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947%.
Dissenter Toichiro Asada argued that with core inflation still below 2%, the economy may not be strong enough to justify another hike, and he supported holding rates steady instead. Core inflation came in at 1.7% in August, down from 1.8% in July. Ayano Sato also said current developments in the economy and prices did not appear to have accelerated substantially from earlier conditions.
The United States has been vocal in backing the continuation of Japan’s rate-hiking cycle, putting pressure on Sanae Takaichi’s preference for easy monetary policy and expansionary fiscal policy. Earlier this month, U.S. Treasury Secretary Scott Bessent told BOJ Governor Kazuo Ueda at the G20 meeting of finance ministers and central bank governors to take “decisive market and monetary steps.”
