Bank of Japan Raises Key Interest Rate to 1.25%, Reaffirms Stance on Further Hikes (Comprehensive)

BOJ: "Rate Hikes Will Depend on Economic and Financial Conditions"

Highest Level in 31 Years, Raised Again After Just Three Months

The Bank of Japan (BOJ), Japan's central bank, has raised its benchmark interest rate from 1.0% to 1.25% for the first time in three months. This is the fastest pace of rate hikes since June, marking another increase after just three months and accelerating the tightening cycle. The BOJ also hinted at the possibility of further rate hikes, causing temporary volatility in financial markets.

On September 18, the BOJ announced after its Monetary Policy Meeting that it decided to raise the short-term policy rate, its key rate, by 0.25 percentage points from the current 'around 1.0%' to 'around 1.25%'. This marks the highest level in 31 years, since 1995. This additional hike comes just three months after the rate increase in June, making it the shortest interval between hikes since Governor Kazuo Ueda took office. The proposal was passed with seven votes in favor and two against out of the nine policy board members.

Kazuo Ueda, Governor of the Bank of Japan (BOJ), is speaking at a press conference following the Monetary Policy Meeting. Tokyo, Japan — Photo by Reuters.

The BOJ cited the rise in oil prices due to Middle East tensions, growing global demand for artificial intelligence (AI), and yen depreciation as factors behind this rate hike. These are consistent with the major risk factors presented at the July meeting. The latest statement notably raised its warning about inflation, stating, "The upward pressure on prices in business-to-business transactions is beginning to spill over to consumers." The bank also noted that medium- to long-term inflation expectations are rising, warning, "There is a risk that the inflation rate will exceed the 2% price stability target to the upside."

The BOJ made it clear that further rate hikes are possible. The statement said, "Although the current financial environment remains accommodative, we will continue to raise the policy rate in accordance with developments in the economy, prices, and financial conditions."

However, market views are divided about the pace of future hikes. In the foreign exchange market, focus was placed on the two dissenting votes among the policy board, rather than the BOJ's stance for further hikes. The yen-dollar exchange rate moved around 156.10 yen per dollar before the BOJ announcement and climbed to the 157-yen range afterward. The Nikkei attributed this to the view that the two dissenting votes suggest that the pace of further hikes may not accelerate as much as expected. Daisaku Ueno, Chief Foreign Exchange Strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "It appears that the intentions of the (Takaichi) administration, which opposes aggressive rate hikes by the BOJ, were reflected in this vote."

On the other hand, Tadashi Matsukawa, Head of Fixed Income at PineBridge Investments, told the Nikkei that if the BOJ fails to keep up while the United States continues to raise rates, inflationary pressures from higher oil prices and yen depreciation could intensify, raising the possibility of another hike as early as October.

Although market forecasts are mixed, it is inevitable that this rate hike will increase household interest burdens. In particular, rates on variable-rate mortgage loans, which are sensitive to interest rate changes, are likely to rise further. Japanese financial institutions typically adjust their standard variable mortgage rates around April and October. If both the June and the latest hikes are reflected in sequence, the Nikkei noted that key banks' variable rates could climb to the range of 1.6–1.7%.

Kazuo Ueda, Governor of the Bank of Japan (BOJ), is taking questions from reporters at a press conference. Tokyo, Japan – Reuters Yonhap News Agency.

Governor Ueda also indicated during an afternoon press conference that further rate hikes to ensure price stability are needed, given Japan's current economic environment, including Middle East tensions and yen depreciation. He especially expressed concerns about inflation. Governor Ueda said, "There is a real risk that the 2% price stability target sought by the BOJ will be exceeded," adding, "The current phase of monetary policy has changed." He emphasized that accommodative financial conditions will continue even after this rate hike, reaffirming his intention to proceed with additional interest rate increases.

During the ensuing Q&A, reporters pressed about the future pace of rate hikes and the terminal rate. While Governor Ueda did not specify any particular rate level or timing for future hikes, he stated that the decision will be made based on developments in economic, price, and financial conditions. Regarding the terminal rate, he explained that the BOJ would determine the appropriate policy level by monitoring whether the inflation rate settles above and remains stable at the 2% price stability target.

This content was produced with the assistance of AI translation services.