Bank of Japan Raises Rate to 1.25% in September 2026, Highest Since 1995, as Ueda Cites Policy Phase Shift

The Bank of Japan raised its policy interest rate to 1.25% in September 2026, the highest level since 1995, in a 7-2 vote of its Policy Board, as Governor Kazuo Ueda cited a "shift in the policy phase", Nikkei Asia reported. The move marked the fourth rate increase since the BOJ exited negative interest rates in March 2024, ending the world's last experiment with sub-zero borrowing costs.

Rate path since 2024

• March 2024: BOJ exits negative rates, sets policy at 0–0.1%
• January 2025: raised to 0.5% — highest since 2008
• December 2025: raised to 0.75% — highest since 1995
• June 2026: raised to 1.0%
• September 2026: raised to 1.25% — new three-decade high, 7-2 board vote

Rationale

Governor Ueda said the economy had entered a new phase in which wage growth and domestic demand were self-sustaining enough to tolerate higher borrowing costs. Core inflation has remained above the BOJ's 2% target for an extended period, driven by labour-market tightness — unemployment has hovered near 2.5% — and the pass-through of import costs from a weaker yen. The two dissenting board members argued that global trade uncertainty, particularly US tariff policy, warranted a more cautious pace of tightening.

Economic backdrop

The rate rise comes against a mixed economic picture. Japan's GDP grew 1.0% in 2025 but contracted 1.8% annualised in the third quarter before recovering modestly in Q4. Early 2026 data showed a rebound: Q1 2026 GDP expanded at the fastest pace in five and a half years, driven by semiconductor exports and recovering domestic demand. The BOJ's Outlook Report projected continued moderate growth with inflation stabilising near 2% over the medium term.

Market and policy implications

The yen strengthened following the announcement as the rate differential with the United States narrowed. Japanese government bond yields rose, with the 10-year benchmark reaching levels not seen since the early 2010s. Economists expect the BOJ to continue normalising gradually, with markets pricing in a further hike to 1.5% by mid-2027, though Ueda reiterated that the pace would remain data-dependent and that the bank was "not on a predetermined path."