The Bank of Japan increased its interest rate to 1.25%, marking the highest level since 1995. The decision followed a 7-2 vote by the board, with members Toichiro Asada and Ayano Sato dissenting. This is the sixth rate hike in the current cycle, which began in March 2024 when the rate stood at -0.1%.
The central bank cited rising energy costs as a primary factor, noting that Japan imported 94% of its crude oil from the Middle East in 2025. Headline inflation in Japan reached 1.9% in August, while core inflation was 1.7%. The bank stated it will continue to adjust monetary policy based on economic activity and price developments.
Global central banks are responding differently to current economic conditions. The US Federal Reserve recently raised its target range to 3.75%-4.00%, and the European Central Bank increased its deposit rate to 2.50%. Meanwhile, the Bank of England maintained its rate at 3.75% despite UK inflation reaching 3.1% in August.
Market analysts polled by Reuters anticipate further increases for Japan. Projections suggest the interest rate will reach 1.5% by the end of March 2027, followed by a rise to 1.75% in the second quarter of 2027. The yen remains under pressure, following a joint intervention by Tokyo and Washington in August after the currency hit a 40-year low.
