Bank of Japan raises policy rate to around 1.25% in 7-2 vote

The Bank of Japan raised its short-term policy interest rate on September 18, 2026. At its Monetary Policy Meeting, the Policy Board decided by a 7-2 majority vote that the Bank will encourage the uncollateralized overnight call rate to remain at around 1.25 percent. The new guideline takes effect on September 24, 2026.

What changed

Alongside the policy rate, the Bank set the interest rate on its complementary deposit facility, which applies to current account balances that financial institutions hold at the central bank, at 1.25 percent. The basic loan rate under its complementary lending facility will be 1.5 percent. Both changes also take effect on September 24.

In a separate, unanimous decision, the Bank changed the loan rate on its operations to support financing for climate change responses to a floating rate and set upper limits on the amount of those loans.

Governor Kazuo Ueda voted for the increase, along with Ryozo Himino, Shinichi Uchida, Hajime Takata, Naoki Tamura, Junko Koeda and Kazuyuki Masu.

Why the Bank acted

The Bank said Japan's economy has recovered moderately, though some weakness has appeared, partly because of the situation in the Middle East. It said the rise in producer prices has stayed high on a year-on-year basis, reflecting expanding AI-related demand, high crude oil prices and the weaker yen. Consumer prices excluding fresh food have been rising moderately, the Bank said, as cost pressures spill over into consumer prices and companies pass wage increases on to selling prices.

The statement said that "medium- to long-term inflation expectations have continued to rise, and underlying CPI inflation has been approaching 2 percent." It warned that "there is a risk that it will deviate upward to a level above the price stability target of 2 percent," given that firms are shifting more toward raising wages and prices.

The Bank said financial conditions remain accommodative and are expected to stay that way after the rate change.

Two dissents

Two board members voted against the move. According to the statement, Toichiro Asada argued that with consumer price inflation excluding fresh food running below 2 percent recently, it could not necessarily be said that the economy was strong, so the Bank should keep its guideline unchanged. Ayano Sato argued that economic and price developments did not appear to have substantially accelerated compared with before, and that it was not appropriate to raise the policy rate at this time.

Why it matters

The Bank of Japan signalled that this is not the last step. It said it "will continue to raise the policy interest rate and adjust the degree of monetary accommodation," while weighing the timing and pace against risks including the Middle East situation, AI-related demand and currency moves. The decision came in the same week that the U.S. Federal Reserve raised its benchmark rate and the Bank of England held its rate with three members voting for an increase, as central banks respond to higher energy prices.

Sources

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.