Bank of Japan Raises Policy Rate to 1.25 Percent, Its Highest Level Since 1995

The Bank of Japan raised its benchmark policy rate by 25 basis points to 1.25% on September 18, marking the highest borrowing costs in Japan in 31 years and the first hike since June. The move was widely expected and aligns the BOJ with other major central banks that have been tightening monetary policy to combat persistent inflation, driven in large part by high energy prices and a weak yen.

The BOJ cited upside risks to inflation as the key justification, warning that price pressures could push underlying inflation beyond its 2% target. The September decision also signals a faster pace of tightening, as it comes just three months after the June hike, which itself brought rates to levels unseen since 1995. Governor Kazuo Ueda was absent from the June meeting due to hospitalization, with Deputy Governor Shinichi Uchida standing in, though no such absence was reported for the September decision.

Investors reacted to the decision following the announcement, with markets focused on any signals the BOJ might give about the future trajectory of rate increases. Sources familiar with the bank's thinking had told Reuters ahead of the meeting that the BOJ could signal a readiness to hike more aggressively if inflation risks intensify further.