Bank of Japan Jacks Rates to a 31-Year High — and a Split Vote Sends the Yen Sliding
Japan's central bank hiked its key rate to 1.25%, the highest since 1995, on fears inflation is running too hot — but two dissenting votes cast doubt on how much further the tightening cycle has left to run.
TOKYO — The Bank of Japan raised its benchmark interest rate by a quarter point to 1.25% on Thursday, the highest level since 1995, as policymakers moved to get ahead of inflation they fear is running hotter than their target allows.
The move marks a distinct quickening of Japan's rate-hike cycle: this increase came just three months after the BOJ's last one, compared with roughly six months between prior hikes since the bank began normalizing policy in 2024.
A split board
The decision passed 7-2, with board members Toichiro Asada and Ayano Sato dissenting in favor of holding rates steady — a split that immediately rattled currency markets. The central bank said the hike was necessary because of a risk that "inflation could deviate upward beyond its 2% target," pointing to annual consumer inflation of 1.9% and core inflation of 1.7% in August. Japan's economy has wrestled with inflation running persistently above target for much of the past two years, a sharp reversal from decades of deflation.
INFLATION COULD DEVIATE UPWARD BEYOND ITS 2% TARGET
Markets read the two dissents as a signal that the pace of further tightening is far from settled. The yen weakened on the news, with the dollar gaining roughly 0.5% to trade above 156.6 yen, even though a rate hike would typically be expected to strengthen a currency. Yields on Japan's 10-year government bond slipped about five basis points to roughly 2.95% as investors recalibrated bets on how aggressively the BOJ will move next.
Why it matters beyond Tokyo
Japan's ultra-low rates have underpinned the global "yen carry trade" for years, in which investors borrow cheaply in yen to fund purchases of higher-yielding assets elsewhere. Every BOJ hike tightens that trade a little further, and past unwinds — including a sharp one in 2024 — have triggered volatility in global equity markets. Thursday's move lands the same week the U.S. Federal Reserve delivered its own first rate hike in years, adding to a busy stretch for global central-bank watchers.
What's next
The BOJ gave no explicit forward guidance beyond the accelerated pace of its recent moves, leaving traders to parse incoming inflation and wage data for clues on timing. A Reuters poll ahead of the meeting had shown economists split on whether another hike would come before year-end.