The Bank of Japan has raised its policy interest rate to 1.25%, marking the highest level since 1995. The decision was reached on September 18 through a 7-2 vote, representing the sixth increase in the current tightening cycle. This move follows a previous hike to 1.00% in June 2026.
US Treasury Secretary Scott Bessent has advocated for tighter monetary policy in Japan since May 2026, citing the need to address imbalances caused by a weak yen. Bessent publicly addressed the issue at the G20 summit in August, emphasizing the importance of currency stabilization and fiscal restraint.
Governor Kazuo Ueda stated that further consecutive rate hikes are possible, including potential increases of 50 basis points if economic conditions require. Two board members, Toichiro Asada and Ayano Sato, dissented from the latest decision, expressing concerns regarding the potential impact on economic growth.
The shift away from long-standing accommodative policies, known as Abenomics, aims to contain inflation driven by rising energy costs. The rate hike affects the yen carry trade, as narrowing interest rate differentials between the yen and the dollar reduce the profitability of borrowing in Japanese currency for investment elsewhere.
