Japan's BOJ Pushes Rates to Their Highest Level in 31 Years

The Bank of Japan (BOJ) raised its benchmark policy rate by 25 basis points to 1.25% on September 18, bringing Japanese borrowing costs to their highest level since 1995. The decision marks the BOJ's second rate hike of the year and a notable quickening in its tightening cycle.

A Split Decision With Clear Direction

The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting from the hike. Despite the dissent, the direction of policy is firmly upward. The move marked a quickening in the BOJ's rate hike cycle since it started monetary policy normalization in March 2024, with this rise taking place just three months after the BOJ's last hike, compared to six months previously.

The BOJ said the move was driven by the risk that inflation will deviate upward beyond its 2% target. Additional factors the central bank flagged included rising crude oil prices, demand tied to artificial intelligence, and continued weakness in the Japanese yen. It cited wage increases being passed along into selling prices, the rise in crude oil prices, and the recent depreciation of the yen.

What Comes Next

The Bank of Japan is widely expected to follow up with another increase by January, in what economists surveyed by Bloomberg describe as a clear acceleration of the policy normalization process. Some 93% of surveyed BOJ watchers expect another move by January, with around one-third predicting it could come as early as December.

For markets, the focus now turns to how Governor Kazuo Ueda frames the path ahead. With money markets pricing in roughly 90 basis points of cumulative hikes over the next 12 months, currency strategists warn that any cautious signaling from Governor Ueda could trigger a "sell the fact" unwinding in the Japanese yen. Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese yen one of the world's cheapest sources of funding, so any sustained shift in that stance carries significant global implications.

Sources:
CNBC: Bank of Japan raises interest rates to 31-year high, flags concerns over inflation
Bloomberg: BOJ Rate Hike Forecasts Accelerate, Survey Shows Next Move by January
FXStreet: Why the Bank of Japan Hike Is a Done Deal and What It Means for the Yen