The Bank of Japan increased its benchmark interest rate by 25 basis points to 1.25% on September 18, 2026. This move marks the highest borrowing cost level in the country since April 1995. The decision was approved by a 7-2 vote under Governor Kazuo Ueda.
The central bank previously raised rates to 1% in June 2026. Current policy adjustments are driven by persistent inflation risks, rising global energy costs, and the continued weakness of the yen. The bank aims to stabilize inflation near its 2% target.
Board members Toichiro Asada and Ayano Sato opposed the hike, citing concerns over the timing of the decision. Following the announcement, the yen weakened to approximately 157 per dollar, despite the bank's efforts to address economic pressures.
Japan's interest rate remains significantly lower than those set by the Federal Reserve and the European Central Bank. This rate differential continues to support the use of the yen as a funding currency for carry trades in global financial markets.
