Bank of Japan Raises Rates to 1.25% But Yen Slides as Ueda Signals Caution on Further Tightening

The Bank of Japan raised its benchmark interest rate by a quarter percentage point to 1.25% on September 18, bringing the policy rate to its highest level since 1995 and delivering the move just three months after its previous increase. The decision came in a split 7-2 vote, with board members Toichiro Asada and Ayano Sato dissenting in favor of holding rates steady, a result that surprised markets.

Rather than rallying, the yen slumped more than 1% and fell past 157 per dollar to a two-week low after BOJ Governor Kazuo Ueda struck a less hawkish tone at his post-decision press conference than investors had anticipated. Ueda emphasized the need to avoid letting prices deviate above target in ways that could harm the economy, language markets read as a signal that the central bank is not committed to aggressive further tightening.

The underwhelming guidance created a fresh complication for US Treasury Secretary Scott Bessent, who had publicly pressured Japan to raise rates, partly as a means of strengthening the yen. With the yen now weaker despite the hike, Bessent's strategy of leaning on the BOJ to do currency-supporting work faces a significant setback. The Nikkei 225, by contrast, gained around 1.5% as the softer tightening outlook relieved pressure on Japanese equities, while the yield on the 10-year Japanese Government Bond slipped.