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The Bank of Japan raised its short-term policy rate by 25 basis points to 1.25 percent at the end of a two-day meeting on Friday a step that takes borrowing costs to their highest level since 1995. The board approved the increase by a seven-to-two vote with Toichiro Asada and Ayano Sato casting the dissenting votes according to Reuters. Bank of Japan Governor Kazuo Ueda said in a subsequent news conference that if risks of underlying inflation overshooting 2 percent materialise that could have a negative impact on Japan’s economy.[[1]](https://www.reuters.com/business/finance/boj-governor-uedas-comments-news-conference-2026-09-18/)
In its accompanying statement the central bank pointed to elevated wholesale inflation that has begun to spill over into consumer prices while underlying inflation approaches its 2 percent target amid broadening wage pressures and rising inflation expectations. Core consumer inflation held steady near that target in August as companies continued passing on higher costs for food and groceries Al Jazeera reported. Executive Director Koji Nakamura had noted earlier in the week a slow-moving demographic shock from a shrinking labor pool that is lifting wages as a structural factor that cannot be dismissed as temporary.[[2]](https://www.aljazeera.com/news/2026/9/18/japans-interest-rate-hiked-to-31-year-high-at-1-25-as-inflation-rises)
This latest adjustment accelerates the Bank of Japan’s tightening cycle that began with the end of negative interest rates in March 2024 and follows its previous hike in June to 1 percent. The three-month interval between increases is the shortest seen under Governor Ueda and reflects preemptive action against risks that inflation could deviate above target due to rising crude oil prices and yen weakness a pattern detailed across multiple outlets including the Financial Times. The Japanese currency weakened to about 157 per dollar immediately after the announcement according to The Guardian.[[3]](https://www.ft.com/content/97a0bed5-0580-4ccc-bd3c-fe9a714259e2?syn-25a6b1a6=1)
The move comes as the Bank of Japan joins other central banks in tightening policy this month with the US Federal Reserve having hiked rates on Wednesday and the European Central Bank lifting its key rate to 2.5 percent last week amid global energy cost spikes tied to conflict in the Middle East. US Treasury Secretary Scott Bessent had publicly pressured Tokyo to raise rates adding to the external factors influencing the decision The New York Times reported. Japan’s policy rate nonetheless remains below those of its peers while authorities have spent billions intervening in currency markets earlier this year to stem yen declines.[[4]](https://www.nytimes.com/2026/09/17/business/japan-interest-rates.html)
Analysts reacted to the decision and accompanying communications by noting a degree of caution in the bank’s outlook. Fred Neumann the chief Asia economist at HSBC stated that the tone of the statement along with two dissenters for the decision to raise rates leaves lingering doubts that Japan’s central bank will be cautious in tightening monetary policy further. Ueda indicated the Bank of Japan would consider various possibilities including larger moves if inflation risks intensify but stressed the current preemptive approach to avoid unintended economic consequences.[[5]](https://www.theguardian.com/business/2026/sep/18/japan-raises-interest-rates-to-31-year-high-rising-prices)
Corporate goods prices which track upstream transaction costs climbed 7.6 percent year on year in August marking the third consecutive month above 7 percent and signaling further potential pass-through to consumers in coming months according to central bank indicators cited by bne IntelliNews. The Bank of Japan plans to quantify the impact of its rate adjustments in its next quarterly outlook report scheduled for October. This marks the sixth rate increase in the current normalization phase as the central bank continues to adjust the degree of monetary accommodation in response to economic and price developments.
