The Bank of Japan Raises Its Policy Rate to 1.25 Percent on a 7 to 2 Vote
The Bank of Japan raised its policy rate by a quarter point, from 1.0 percent, to around 1.25 percent on 18 September, on a 7 to 2 majority vote of its Policy Board, and said underlying consumer price inflation has been approaching 2 percent. The new level is Japan’s highest since 1995, per CNBC.
The decision ends the period at 1.0 percent that began in June. It lands two days after the Federal Reserve raised its own target range and one day after Taiwan’s central bank left its discount rate unchanged.
What the board decided
The Bank will encourage the uncollateralised overnight call rate to remain at around 1.25 percent. The guideline was changed on a 7 to 2 majority vote, and the interest rates applied to the Bank’s own measures were changed on a separate 7 to 2 majority vote.
The statement names the two dissenters on the guideline vote, and both wanted no increase. Asada Toichiro argued that with the rate of increase in the CPI for all items less fresh food below 2 percent recently, it could not necessarily be said that the economic situation was strong, and preferred maintaining the existing guideline. Sato Ayano considered that current economic and price developments did not appear to have substantially accelerated compared with before, and that it was not appropriate to raise the policy interest rate at this time. The statement does not say whether the same two members cast the dissents on the separate vote on the Bank’s own rates.
The rate applied to the complementary deposit facility, which is the rate applied to current account balances held by financial institutions at the Bank excluding required reserve balances, will be 1.25 percent. The basic loan rate applicable under the complementary lending facility will be 1.5 percent, and the basic discount rate stipulated in the same paragraph of the Act will also be 1.5 percent, although the discounting of bills is currently suspended.
All of it takes effect on 24 September. The deposit facility therefore comes to rest level with the call rate guideline, while the lending facility sits 25 basis points above it, on our calculation.
| Measure | New rate | Effective from |
|---|---|---|
| Uncollateralised overnight call rate, guideline | Around 1.25% | 24 September 2026 |
| Complementary deposit facility | 1.25% | 24 September 2026 |
| Basic loan rate, complementary lending facility | 1.5% | 24 September 2026 |
| Basic discount rate | 1.5% | 24 September 2026 |
Source: Bank of Japan, Change in the Guideline for Money Market Operations, 18 September 2026. The basic discount rate applies to the discounting of bills, which is currently suspended.
Two further decisions were taken unanimously rather than on the split vote. On the funds supplying operations that support financing for climate change responses, the Bank moved the loan rate to a floating rate and set upper limits on the amount of loans, with the aim of providing stable support for private sector efforts on climate change while ensuring the smooth conduct of market operations. It also changed the loan rates on the operations that support financial institutions in disaster areas and on the operations against pooled collateral, and removed the Great East Japan Earthquake from the category of designated disasters following the loan disbursement in May 2027, given factors such as the recent usage of the operation.
Why the board moved
The assessment is that Japan’s economy has recovered moderately, although some weakness has been seen in part, partly because of the impact of the situation in the Middle East. Growth is expected to continue moderately, because although the rise in crude oil prices reflecting the situation in the Middle East is expected to push down economic activity, the economy is likely to be underpinned by factors such as the government’s various measures and an increase in global demand related to artificial intelligence.
The year on year rate of increase in the producer price index has continued to be high, reflecting the impact of the expansion in demand related to artificial intelligence, in addition to high crude oil prices and the depreciation of the yen. Consumer prices excluding fresh food have been rising moderately, as upward pressure on prices in business to business transactions has started to spill over into consumer prices and as moves to pass wage increases into selling prices have continued.
The order of that description is, on our reading, what carries the decision. Producer prices rise first, business to business costs then spill into consumer prices, and wage increases are passed into selling prices. Medium to long term inflation expectations have continued to rise, and underlying consumer price inflation has been approaching 2 percent. Economic activity and prices are developing generally in line with the baseline scenario in the July 2026 Outlook for Economic Activity and Prices.
On risks, the situation in the Middle East, the expansion in demand related to artificial intelligence and developments in foreign exchange rates were all named as warranting attention. The Bank also said there is a risk that underlying consumer price inflation deviates upward to a level above the 2 percent price stability target, given factors such as firms shifting further toward raising wages and prices and medium to long term inflation expectations rising. Financial conditions have been accommodative, with real interest rates at low levels mainly in the short to medium term areas, and accommodative conditions are expected to be maintained after the change in the policy rate.
Economists had all but ruled out a hold
A Reuters poll conducted from 1 to 8 September found 66 of 68 economists, or 97 percent, expecting the rate to be lifted to 1.25 percent on 18 September, up from 57 percent in the previous poll.
Japan’s trade figures for August were published two days before the decision. Customs figures published by the Ministry of Finance on 16 September put August exports at 10,048,375 million yen, up 19.3 percent on the year, and imports at 11,153,982 million yen, up 28.0 percent, leaving a deficit of 1,105,607 million yen against 294,090 million a year earlier. Imports grew 8.7 percentage points faster than exports, on our calculation, and the deficit came in at 3.76 times its year earlier size, a widening of 811,517 million yen in twelve months. The month’s shortfall is equal to 11.0 percent of the month’s exports, on our calculation. That is the weak yen and expensive energy combination the Bank named in its producer price passage, arriving on the external account, on our reading.
Japan tightens, Taiwan holds
The Federal Reserve raised its target range by a quarter percentage point to 3.75 to 4.00 percent on 16 September on a unanimous 12 to 0 vote. Japan has now followed with its own quarter point. The top of the United States range sits 2.75 percentage points above the new Japanese guideline and the bottom of it 2.50 points above, on our calculation.
Taiwan did not move on 17 September, leaving its discount rate at 2.000 percent and raising the cap on the loan to value ratio for a second home from 60 percent to 70 percent. Its central bank forecasts consumer price inflation of 2.03 percent this year and 1.83 percent next year. No comparable forecast was published alongside the decision in Tokyo, so the two are not set against each other here.
Why it matters: The quarter point matters less than the reasoning set out with it. The decision was rested on underlying inflation approaching 2 percent, on upward pressure in business to business transactions spilling into consumer prices, and on wage increases being passed into selling prices. That is an argument about how prices are being set in Japan rather than about a single month of data, and on our reading it is the argument that governs how far the Bank goes next: the risk named alongside it is that underlying inflation deviates above the 2 percent target, not that it falls short of it. For Japanese borrowers, and for the financial institutions holding current account balances at the Bank, the practical effect arrives on 24 September, when the 1.25 percent deposit facility rate and the 1.5 percent lending facility rate both take effect.
Outlook: The published record of the discussion follows in the Summary of Opinions on 1 October and the minutes of the meeting on 5 November, both at 8:50 in the morning Tokyo time. No Outlook Report accompanied this round, so the next full set of forecasts is due with the meeting that ends on 30 October. Both dissenters argued against an increase at this meeting, so the near question those documents will answer is whether that view gained any ground inside the board, and the wider one is whether 1.25 percent is a waypoint or close to where the Bank intends to stop. The Bank’s stated risk assessment bears on that question: it named the risk that underlying consumer price inflation deviates upward above the 2 percent target if firms keep shifting toward raising wages and prices and medium to long term inflation expectations keep rising.
Sources: Bank of Japan, Ministry of Finance of Japan, Reuters, CNBC, Federal Reserve, Central Bank of the Republic of China.
