Bank of Japan Raises Benchmark Rate to 1.25%, Highest Since 1995

Today’s Focus

The Bank of Japan (BOJ) raised its benchmark interest rate on Friday from 1% to 1.25%, the highest level since 1995, according to reporting by the BBC and The Guardian.

It is the sixth increase in roughly two and a half years, following the BOJ’s 2024 decision to lift the rate out of negative territory, where it had sat at minus 0.1%.

The vote on the policy board was not unanimous. Two members dissented against the increase, The Guardian reported.

The move puts the BOJ alongside other major central banks tightening this month. The US Federal Reserve raised its benchmark this week for the first time in more than three years, and the European Central Bank increased borrowing costs earlier in September, per the BBC.

The Bank of England held UK rates at 3.75% on Thursday but warned they could rise soon because of fallout from the Iran war, according to The Guardian.

Japanese officials have faced pressure to act as the yen weakened steadily against the dollar this year, at points prompting intervention to stabilize the currency. The yen slipped about 0.7% against the dollar on Friday after the announcement, and the Nikkei stock index climbed close to 2%, The Guardian reported.

Inflation data released the same morning showed core prices rising 1.7% in August, down from 1.8% in July but still near the BOJ’s 2% target, according to the BBC.

Governor Kazuo Ueda’s board framed the hike as part of a gradual normalization after decades of ultra-loose policy. Market analyst Lale Akoner of eToro told the BBC that “one of the world’s last sources of ultra-cheap money is disappearing.”

The Debate

Supporters argue

Backers of the increase say Japan can no longer sustain rates far below those of other advanced economies without further weakening the yen and importing more inflation through energy and food.

Fred Neumann, chief Asia economist at HSBC, told The Guardian the statement’s cautious tone and the two dissents suggest the BOJ will move deliberately, but he added that investors are watching for “clues as to whether officials are prepared to raise interest rates again in December.”

Proponents point to core inflation sitting near the 2% target for an extended period as evidence that the deflationary era Japan spent decades fighting has ended, making very low rates unnecessary.

Akoner argued to the BBC that removing the world’s last major pool of ultra-cheap money reflects a normalization long sought by Japanese policymakers.

Supporters also note the currency stakes. Repeated yen weakness this year forced Tokyo into market intervention, and higher rates make yen-denominated assets more attractive to global investors, easing that pressure without direct currency operations.

Critics argue

The two dissenting BOJ board members, according to The Guardian, opposed the hike, reflecting worries inside the bank that Japan’s recovery remains fragile and that back-to-back increases could choke off wage growth and consumer spending.

Critics outside the bank note that core inflation actually eased in August to 1.7%, per BBC figures, arguing the case for further tightening is weaker than headline comparisons to the Fed and ECB imply.

Japan also faces a shrinking workforce and sluggish domestic demand, structural problems that higher borrowing costs do not solve and could worsen if credit tightens for small businesses.

HSBC’s Neumann said the statement “leaves lingering doubts” about how far the BOJ is willing to go, a caution critics say the bank should heed before another move in December.

Some analysts warn that a stronger yen, while helpful against imported inflation, would hurt Japanese exporters whose earnings have supported the Nikkei’s run this year.

What the experts say

The International Monetary Fund’s July 2026 World Economic Outlook Update projected Japanese growth of about 0.6% for the year, well below the US and euro area, and flagged monetary normalization as a delicate balancing act between currency stability and domestic demand.

Research from the Peterson Institute for International Economics has argued that Japan’s decades of near-zero rates were driven by chronic deflation and demographic decline, and that even at 1.25% Japan’s policy rate remains far below the Fed’s target range and the ECB’s deposit rate, limiting the yen’s likely rebound.

Historical comparison helps frame the move. The last time the BOJ’s rate stood at 1.25% was 1995, before the Asian financial crisis, Japan’s banking troubles of the late 1990s, and the global financial crisis pushed it into a long experiment with zero and then negative rates, according to BOJ historical data cited by both the BBC and The Guardian.

Brookings Institution scholars have noted that global tightening cycles tied to energy shocks, like the current one linked to the Iran war, tend to be shorter than inflation-driven cycles, suggesting the BOJ’s path will depend heavily on how long oil prices remain elevated.

By the Numbers

1.25%: the Bank of Japan’s new policy rate, up from 1%, per the BBC.

1995: the last year Japan’s benchmark rate stood at this level, according to the BBC and The Guardian.

6: number of BOJ rate increases since 2024, when the rate was minus 0.1%, per the BBC.

2: BOJ board members who dissented against Friday’s decision, The Guardian reported.

1.7%: Japan’s core inflation rate in August, down from 1.8% in July, per official figures cited by the BBC.

0.7%: the yen’s decline against the dollar on Friday after the announcement, according to The Guardian.

3.75%: the Bank of England’s rate, held steady on Thursday with a warning it could rise, per The Guardian.