The Bank of Japan raised its benchmark policy rate to 1.25% on Friday, the highest level in 31 years, as officials continued moving away from the ultra-low interest-rate policies that defined Japan for much of the past generation.
The central bank increased the rate from 1% in a 7-2 vote. Board members Toichiro Asada and Ayano Sato dissented, according to the decision reported by Reuters.
Why the BOJ is tightening
The central bank is trying to prevent inflation from moving persistently above its 2% target while balancing risks to economic growth. Higher energy costs, currency weakness and changing global interest-rate conditions have all complicated that calculation.
Japan spent years fighting deflation and weak price growth, which led to exceptionally loose monetary policy. The current cycle represents the reverse problem: policymakers are trying to normalize rates without destabilizing households, businesses or financial markets that became accustomed to cheap borrowing.
The move also matters internationally because the yen has long been used as a low-cost funding currency. Higher Japanese rates can affect currency trades, bond markets and global capital flows.
Markets will focus on what comes next
The 1.25% rate was widely expected, so investors are likely to focus more heavily on Governor Kazuo Ueda’s guidance about future increases. A faster pace of tightening could support the yen but increase borrowing costs at home.
The BOJ’s decision also comes during a broader shift in global monetary policy as several major central banks respond to renewed inflation pressure. That makes Japan’s next steps part of a larger question over whether the world is entering another period of higher-for-longer rates.
Sources: Bank of Japan policy decision, Reuters and Associated Press reporting published September 18, 2026.
