BOJ lifts rate to highest since 1995
On Friday, the Bank of Japan lifted its policy rate by a quarter point, bringing it to 1.25% — a level not seen since 1995. The vote was 7-2, with board members Toichiro Asada and Ayano Sato opposed. Both are regarded as reflationists and were named to the board by Prime Minister Sanae Takaichi earlier this year. The quarter-point move had been broadly anticipated: nearly 90% of economists in a CNBC survey had forecast it, and those same respondents had also named the two dissenters correctly.[S1][S2]
According to the BOJ, the increase was prompted by the danger that inflation could drift above its 2% objective. The central bank also stated that it wants underlying inflation anchored near 2%, so that price growth does not exceed the target and later damage Japan's economy. The step also signaled an acceleration in the BOJ's hiking path since it launched monetary policy normalization in March 2024: this rise arrived three months after the prior one, whereas the earlier gap had been six months.[S1]
Inflation, yen and coordinated intervention
The rate increase lands against a backdrop of climbing prices in Japan and a yen that is historically weak. August's headline inflation reading was 1.9%, and core inflation came in at 1.7%, easing from 1.8% in July. Data released by officials on Friday, before the BOJ made its announcement, indicated that inflation had moderated slightly during the month. Although Japan's inflation is modest by global comparison, rising prices are still a fairly recent phenomenon following roughly three decades of very low inflation or deflation.[S1][S2]
Following the decision, the currency stood at 156.64, a decline of 0.45%, while the yield on the benchmark 10-year Japanese government bond dropped 4.9 basis points to 2.947%. In August, Tokyo and Washington said they had acted together to stop the yen's slide after it touched a new 40-year low. That joint action was the first of its kind since 2011, when the two nations cooperated to weaken the yen following the earthquake and tsunami in eastern Japan. Japan's Ministry of Finance and US Treasury Secretary Scott Bessent both indicated then that further joint interventions could follow without hesitation.[S1][S2]
Dissent and external pressure
Dissenter Toichiro Asada said that with core inflation under 2%, he judged the economy might not be strong, and therefore favored keeping rates unchanged. Ayano Sato likewise argued that recent economic and price trends did not seem to have picked up substantially from earlier. Washington has openly urged Japan to keep raising rates, which runs against Takaichi's preference for loose monetary policy and expansive fiscal policy. Most recently, Treasury Secretary Scott Bessent pressed BOJ Governor Kazuo Ueda to take decisive market and monetary action at this month's G20 finance ministers and central bank governors gathering. Bessent has also intensified pressure on the BOJ to lift rates in support of the yen, telling Ueda to do the right thing.[S1][S2]
Japan must contend with a chronically weak yen, climbing prices and a labor force that keeps shrinking. Central banks worldwide are tightening as the Iran war drives energy costs higher and fuels inflation. Oil and gas prices have climbed globally this year because the Iran war severely disrupted shipping through the Strait of Hormuz, a vital route. Japan is especially exposed to such supply shocks given its heavy dependence on Middle Eastern energy. Since beginning normalization, the BOJ has been gradually raising its rate in an effort to match levels seen in other major economies.[S2]
