The Bank of Japan raised the target short-term interest rate from 1% to 1.25% – the highest since 1995. The decision was supported by seven out of nine council members. The new rate will take effect on September 24. This is the first increase since June when the rate reached 1%.
The regulator pointed to increasing price pressures: companies continue to pass on rising wages and production costs to consumers, while inflation expectations are growing. Additional risks are posed by expensive oil, a weakening yen, and global demand for AI equipment, which is pushing up prices for semiconductors and other tech goods. According to the Bank of Japan, core inflation has approached the target of 2% and risks exceeding this mark; in the second half of the 2026 fiscal year, the figure could significantly surpass the target.
Official statistics, however, paint a less clear picture. In August, consumer prices excluding fresh food rose by 1.7% year-on-year after a 1.8% increase in July. The figure excluding food and energy rose by 1.9%.
Two council members opposed the increase – Toichiro Asada and Ayano Sato. Asada noted that inflation remains below 2%, and the state of the economy cannot be considered sufficiently stable. Sato did not see significant acceleration in economic activity and price growth to justify the increase. Despite the disagreements, the central bank maintained its course towards further tightening: "The bank will continue to raise the key interest rate and reduce the degree of monetary stimulus depending on changes in economic activity, prices, and financial conditions." Analysts surveyed by Reuters expect an increase to 1.5% by the end of March and to 1.75% in the second quarter of 2027.
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