Bank of Japan Raises Interest Rate to 1.25%, a 31-Year High

The Bank of Japan raised its target interest rate to 1.25% on Sept. 18, 2026, up from 1%, putting borrowing costs at their highest level since 1995, according to The Guardian. The bank's nine-member policy committee approved the increase, though two members dissented, the Guardian reported.

Why did the BoJ raise rates now?

The BoJ cited global inflation tied to the war in Iran as the driver behind the move, per the Guardian's reporting. Japan's inflation rate stood at 1.9% in August 2026, just under the central bank's 2% target, the Guardian reported, citing bank data. Governor Kazuo Ueda told reporters the BoJ has shifted its policy focus from boosting inflation to keeping it from exceeding that 2% ceiling. "Up until now, our short-term policy focus was to," Ueda said, according to the Guardian's partial transcript of his remarks — a sentence the bank did not finish being quoted in full.

How does this compare with the Fed and ECB?

The rate increase places the BoJ alongside the U.S. Federal Reserve and the European Central Bank, both of which tightened policy this month, according to the Guardian. That marks a rare instance in the post-2020 period of all three major central banks moving in the same direction within the same reporting window. The Bank of England, by contrast, held its rate at 3.75% on Sept. 17, 2026, though it signaled increases could follow given fallout from the Iran conflict, the Guardian reported.

What did Ueda say about future rate hikes?

Ueda declined to rule out consecutive rate increases at upcoming meetings. "That depends on how price conditions develop," he said, per the Guardian. "There could be various possibilities. We shouldn't rule anything out. We're at a phase where we need to look at various data carefully. But that doesn't mean we can move slowly. We will analyse data carefully and take timely action as needed." The BoJ's policy committee convenes eight times a year — roughly once every six weeks — and Ueda said there is no fixed cadence for future moves. "As for the pace of future rate hikes, we don't have any pre-set idea in mind such as once every three months," he said, according to the Guardian. "We will determine at each policy meeting how best to ensure underlying inflation stabilises at 2%."

How does this fit the BoJ's longer normalization path?

Friday's increase extends a tightening cycle the BoJ began in 2024, when it exited negative interest rates for the first time in years, the Guardian reported. The move from 1% to 1.25% is the latest step in that gradual climb rather than a single sharp jump, consistent with the incremental pace the bank has followed since 2024.

What does a split vote signal about the BoJ's next move?

The 2-vs-7 split on the nine-member committee indicates the decision was not unanimous, the Guardian reported, though the dissenting members' specific objections were not detailed in available reporting. Ueda's refusal to commit to a fixed schedule, combined with the internal dissent, leaves the timing of the BoJ's next rate decision — and whether it comes at the panel's next scheduled meeting roughly six weeks out — an open question tied to incoming inflation data.