（Singapore, 18.09.2026）The Bank of Japan raised interest rates for the second time in three months on Friday, accelerating its shift away from years of ultra-low borrowing costs as persistent inflation pushes policymakers into a new phase of monetary tightening.
The BOJ lifted its benchmark rate by 25 basis points to 1.25%, a move widely expected by economists and largely priced into financial markets before the announcement. The three-month gap from its previous increase was the shortest between BOJ rate hikes since 1990, when rapid monetary tightening contributed to the end of Japan’s asset-price boom.
Despite the increase, the yen weakened sharply as investors found Governor Kazuo Ueda’s guidance on future rate moves less aggressive than expected. The currency fell as much as 1.3% to around 158.05 against the dollar, while Japan’s export-heavy Nikkei 225 gained 1.4%.
The decision was also not unanimous. BOJ board members Toichiro Asada and Ayano Sato opposed the increase, resulting in a 7-2 vote. Both were appointed by Prime Minister Sanae Takaichi, raising questions among investors over whether resistance to further tightening could grow within the central bank.
Ueda nevertheless made clear that the BOJ sees inflation risks changing. With underlying inflation moving closer to the bank’s 2% target, he said policymakers increasingly need to guard against prices rising too far above that level.
“It has become important to stabilize the rate of price increases at a level of around 2%,” Ueda told reporters after the decision, adding that the “phase of policy has shifted to a new stage.”
He said the BOJ should act early enough to avoid a situation in which it is eventually forced to raise rates rapidly. Asked whether the bank could increase rates again at its October meeting or make a larger move in the future, Ueda said policymakers would not rule out any options in advance.
Markets wanted a stronger signal
Those comments were not enough to lift the yen because investors had already expected a relatively hawkish message from the central bank. Friday’s rate increase had been almost fully priced in by early September, leaving traders focused on how quickly the BOJ might move again.
The two dissenting votes added to the uncertainty. Kento Minami, senior economist at Daiwa Securities, said the split was more dovish than markets had expected, even though the BOJ’s assessment of economic conditions, inflation and financial markets continued to suggest a need for faster tightening than in the past.
Japan’s broader Topix index was little changed as weaker financial shares offset gains elsewhere, while Japanese government bond yields edged lower. The market impact outside Japan was limited.
The yen’s weakness also puts currency intervention back into focus. Japan and the United States carried out a coordinated yen-buying operation at the end of July after the currency touched about 163.99 per dollar, its weakest level in roughly four decades.
Japan spent a record ¥15.4 trillion (S$125 billion) on intervention in the month through Aug. 26, according to Finance Ministry data. The yen remains stronger than its July low, but another move toward 160 could increase market attention on whether authorities might step in again.
Friday’s increase was the sixth under Ueda, the most rate hikes delivered by any BOJ governor in at least half a century. It also came as the global interest-rate environment shifts in response to inflation pressures linked partly to the Iran war and higher energy costs.
The Federal Reserve raised rates earlier this week, while the European Central Bank increased borrowing costs last week for the second time this year. September therefore marks the first time the BOJ, Fed and ECB have all raised interest rates in the same month, highlighting how Japan has moved away from its long-standing position as an outlier among major central banks.
Inflation keeps pressure on BOJ
Japan’s main inflation gauge remained above 2% for a fourth consecutive year through 2025, and the BOJ expects price growth to stay above its target in the coming years. Analysts expect inflation to accelerate toward 3% by early next year.
The central bank warned that underlying inflation could move above its 2% price-stability target as companies become more willing to increase wages and prices, while medium- and long-term inflation expectations continue to rise.
At 1.25%, the policy rate has also entered the lower end of the BOJ’s estimated neutral-rate range for the first time. The neutral rate is generally viewed as a level that neither stimulates nor restricts economic activity, suggesting Japan’s long process of moving away from exceptionally loose monetary policy has reached another milestone.
Still, inflation data released earlier Friday showed core price growth slowed slightly in August, partly because of government subsidies. The lack of a clear acceleration in inflation was among the reasons Asada and Sato saw little need for another increase at this meeting, potentially making it more difficult for Ueda to build consensus for another move this year.
Markets are nevertheless pricing in further tightening, with overnight swaps indicating about an 85% chance of another increase in December. The BOJ reiterated that it would continue raising rates if economic activity and prices develop in line with its forecasts.
Attention will now turn to whether the yen continues to weaken and how the BOJ communicates its next steps ahead of upcoming meetings. A renewed slide toward 160 per dollar could also bring the possibility of another Japan-US currency intervention back to the forefront, particularly if investors begin scaling back expectations for further BOJ tightening.
