Bank of Japan hikes rates to 31-year high to battle inflation

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A woman walks in front of the Bank of Japan headquarters in Tokyo, Japan. File | Photo Credit: Reuters

The Bank of Japan (BoJ) raised interest rates to a more than 30-year high on Friday (September 18, 2026) and said it would lift them further as it looks to counter inflation fuelled by surging energy prices and a weak yen.

The 25-basis-point hike to 1.25% was expected by markets following the recent tightening by the European Central Bank and the U.S. Federal Reserve, though the decision was not unanimous as it was carried by a 7-2 majority vote.

Pressure has increased on officials to further tighten monetary policy as a spike in oil prices caused by the West Asia crisis — which shows little sign of ending anytime soon — is expected to keep putting upward pressure on inflation.

"Given that underlying CPI inflation has been approaching 2% and financial conditions have been accommodative, the bank will continue to raise the policy interest rate," the BoJ said on its website.

Central bankers are keeping tabs on movements in the yen, which fell to a 40-year low against the dollar in July, prompting a historic joint U.S.-Japanese intervention in foreign exchange markets.

The unit has been weighed in particular by the wide gap between Japan's still low interest rates and those of the Federal Reserve, which encouraged investors to favour better-yielding dollar-denominated assets.

Despite the hike to the highest since 1995, which had been telegraphed for weeks, the yen weakened to more than 157 per dollar, compared with around 156.30 before the announcement.

"For a market looking for evidence that the BoJ could shorten the distance between hikes, those dissents mattered," said Stephen Innes at Quintex Intel.

"Traders were looking for signs that the Bank could move faster from here, yet two members were already arguing that even today's move had come too soon."

The cheap yen is driving up the cost of imported goods, which in turn is putting upward pressure on inflation.

Still, figures on Friday (September 18, 2026) showed core inflation fell to 1.7% in August from 1.8% but remains close to the BoJ's 2% target.

The reading from the Internal Affairs Ministry, which excludes volatile fresh food prices, was lower than forecasts for it to remain unchanged.