Bank of Japan Lifts Rate to 1.25%, a 31-Year High
The Bank of Japan raised its policy rate target to 1.25% from 1% on September 18, 2026. The Guardian The decision followed a two-day board meeting on September 17 and 18 and set the uncollateralized overnight call rate, the rate banks charge each other for overnight loans, at 1.25%. Nikkei Asia The vote was 7-2. Reuters
At 1.25%, the target stands at its highest since 1995, a 31-year high. The Guardian The increase extends a tightening sequence that began when the Bank lifted its base rate out of negative territory in 2024. Like turning down easy money, each step makes borrowing a little more costly.
The vote and the buildup
The Bank had raised the policy rate to around 1.0% at the June 2026 meeting, according to a September 2 statement. A proposal at the July 31, 2026 meeting to keep the overnight rate at around 1.25% was defeated by a majority vote. On June 16, 2026, the Bank had set the basic loan rate under the complementary lending facility, its backup lending program for banks, at 1.25%. Board members Asada and Sato dissented from the September decision to raise rates to 1.25%. Reuters On September 18, the Bank published the operating documents tied to the vote: Change in the Guideline for Money Market Operations, (Reference) Change in the Guideline for Money Market Operations (September 2026 MPM), Amendment to Principal Terms and Conditions of Complementary Deposit Facility, and Amendment to Principal Terms and Conditions of the Funds-Supplying Operations to Support Financing for Climate Change Responses. Bank of Japan
Market reaction
The yen weakened about 0.7% against the dollar after the decision, while the Nikkei stock index rose nearly 2%. Japanese two-year government bond yields fell four basis points, or 0.04 percentage points, to 1.82% after the decision. The Guardian The September increase was widely expected. Reuters The Bank of England, deciding the same day, left UK rates on hold at 3.75%. Analysts polled by Reuters expected Japan's rate to reach 1.5% by end-March next year and 1.75% in the second quarter of next year. Reuters
The broader context here is the sequence. June set around 1.0%. July rejected around 1.25%. September adopted it. That two-month interval with a steady 7-2 split points to a board negotiating pace rather than direction. How the money-market guideline and deposit facility pass the 1.25% target into bank reserves and short-term funding will shape very short-term control. The softer yen and lower two-year yields after a hike suggest investors had priced in the move and shifted focus to where rates will stop.
In my view, the Reuters-polled expectations for 1.5% by end-March and 1.75% in the second quarter frame the next test. A further move would require turning the current majority into lasting agreement despite opposition from Asada and Sato. The Bank has operating room through its lending and deposit facilities. But its communication around the neutral rate, the level that neither speeds nor slows the economy, and the conditions for pausing will carry more weight than any single meeting. Tokyo is tightening while London holds.
