Japan Raises Interest Rate to 1.25 Percent, Highest in 31 Years

TOKYO, KOMPAS.com - The Bank of Japan (BOJ), Japan's central bank, raised its policy interest rate by 25 basis points to 1.25 percent.

This increase brings Japan's central bank interest rate to its highest level since 1995.

As reported by CNBC on Friday (September 18, 2026), the decision is part of BOJ's monetary policy normalization process that began in March 2024.

SHUTTERSTOCK Illustration of the Japanese flag.

The Bank of Japan also accelerated its rate hike cycle, with the latest decision coming just three months after the previous increase, compared to a six-month interval during the earlier period.

The interest rate hike comes as Japan faces inflationary pressures and a historically weak yen exchange rate.

In its statement, BOJ cited the risk of inflation deviating upwards beyond its 2 percent target as one of the reasons behind the decision.

BOJ Raises Interest Rate by 25 Basis Points

The decision to raise BOJ’s interest rate was approved by a 7-2 vote.

Two BOJ board members, Toichiro Asada and Ayano Sato, opposed the increase.

Both are known as supporters of reflation policies and were appointed by Japanese Prime Minister Sanae Takaichi earlier this year.

The 25 basis point hike was widely anticipated by economists. Nearly 90 percent of economists surveyed by CNBC expected BOJ to raise rates by the same margin.

PEXELS/NATALIYA VAITKEVICH Illustration representing interest rates.

The surveyed economists also correctly predicted the dissenting votes within the board.

This decision marks an acceleration in BOJ’s rate hike cycle since the central bank began normalizing its monetary policy in March 2024.

Previously, BOJ waited six months before raising rates again; now, the interval is only three months.

With this hike, Japan’s policy interest rate now stands at 1.25 percent, the highest since 1995.

Reasons Behind BOJ’s Rate Hike

In its statement, BOJ explained that the decision was based on risks of inflation rising above its 2 percent target.

The central bank also expressed its aim to stabilize core inflation at around 2 percent.

This move is intended to prevent price increases from overshooting the target and harming Japan’s economy.

“Around 2 percent” is the fundamental inflation rate BOJ seeks to stabilize.

The decision comes amid rising inflation in Japan. Headline inflation in August 2026 recorded 1.9 percent.

Meanwhile, Japan’s core inflation in August 2026 was at 1.7 percent, down from 1.8 percent in July 2026.

Divergent views on inflation and economic conditions contributed to the two board members opposing the rate hike.

FREEPIK/VWALAKTE Illustration of inflation.