The Bank of Japan raised its key short-term interest rate by 25 basis points to 1.25% in September, pushing borrowing costs to their highest level since April 1995 and taking another step away from decades of ultra-loose monetary policy.
The decision passed by a 7-2 vote, with Toichiro Asada and Ayano Sato opposing the increase. The split highlights a growing challenge for the BOJ: inflation is keeping pressure on policymakers to tighten, but support for moving quickly is far from unanimous.
Inflation Keeps the BOJ Moving
Higher oil and energy costs have complicated Japan’s inflation outlook, with the BOJ expecting price growth to stay above its 2% target over the coming years. Analysts see inflation approaching 3% by early next year, strengthening the case for tighter policy. The pace of tightening is also picking up. September’s increase came only three months after the previous hike, the shortest gap between BOJ rate increases since 1990. The decision followed calls from Washington for higher Japanese rates, including comments from US Treasury Secretary Scott Bessent.
How Fast Can Japan Keep Hiking?
The move to 1.25% confirms that Japan’s long monetary-policy shift is still underway, but the 7-2 split could make the next step less straightforward. Persistent inflation would strengthen the case for another increase, while softer growth or tighter financial conditions could give dissenting policymakers more reason to resist a faster pace.
Source: Bank of Japan
Monetary policy remained a key driver at the end of the week following the Federal Reserve’s first rate hike since July 2023.
Fed Hikes to 4%, and It May Not Be DoneThe Federal Reserve raised interest rates for the first time since 2023, delivering a unanimous 25 basis point increase to 3.75%–4.00% in September.
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