Bank of Japan Raises Policy Rate by 25 Basis Points to 1.25%, Signals Further Hikes

• Bank of Japan raised policy rate by 25 basis points to 1.25% on September 18.
• New rate is a 31-year high, highest since 1995, decided by 7-2 vote.
• BoJ signaled further hikes, expecting underlying CPI above 2%.

The Bank of Japan (BoJ) raised its policy rate by 25 basis points to 1.25% from 1.00% on September 18, a move that was widely anticipated by the market. This adjustment marks the highest benchmark rate since 1995, representing a 31-year high. The decision was reached with a 7-2 majority vote, with board members Toichiro Asada and Ayano Sato dissenting, which some analysts suggest could temper aggressive market pricing for future tightening despite the explicit hike.

The BoJ’s statement included forward guidance indicating a commitment to continue raising rates in response to developments in economic activity, prices, and financial conditions, signaling that this is not a one-off adjustment. The central bank also highlighted expectations for underlying consumer price inflation to accelerate above 2% from the second half of the fiscal year. Prior to the decision, money market rates had surged since June, and the market was closely pricing in an additional 25 basis point hike by year-end, with a potential for a yen-negative reaction if the BoJ had failed to confirm a more aggressive tightening cycle.