Bank of Japan Increases Interest Rate to 1.25%, Highest Since 1995

On September 18, 2026, the Bank of Japan (BOJ) raised its benchmark policy interest rate by 25 basis points to 1.25%, the highest level since April 1995. This decision was made with a 7-2 vote, led by Governor Kazuo Ueda, who indicated that further rate hikes could follow if inflation pressures persist.

This latest increase is part of the BOJ's ongoing normalization campaign, which began in March 2024 when it exited negative interest rates. The current hike follows a previous increase to 1% in June 2026, making this the first adjustment in three months.

Despite the rate hike, the Japanese yen weakened to approximately 157 per dollar, contrary to expectations that a rate increase would strengthen the currency. In contrast, Japanese equities responded positively, with the Nikkei 225 rising about 1.9% after the announcement.

The BOJ's decision comes amid rising energy costs and a weak yen, which have significantly impacted inflation rates in Japan. Governor Ueda emphasized the bank's commitment to stabilizing inflation around its 2% target, while also noting the importance of careful future decision-making in light of economic risks.

Market reactions have raised questions about the effectiveness of the BOJ's rate hikes, as the yen's continued weakness suggests that additional interventions may be necessary. The internal dissent within the BOJ, highlighted by the two board members who voted against the increase, indicates ongoing debates about the pace of monetary tightening.