Bank of Japan raises key interest rate to 31-year high of 1.25%

September 18, 2026 (MLN): The Bank of Japan (BoJ) on Friday raised its short-term interest rate (the uncollateralized overnight call rate) to around 1.25% from around 1%, taking it to its highest level in 31 years.

The decision came at the conclusion of a two-day monetary policy board meeting and was widely anticipated, having already been factored into global markets in recent weeks.

The central bank said Japan's economy has recovered moderately despite the impact of the situation in the Middle East, supported by rising global AI-related demand, an improvement in employment and income conditions, and various government measures, according to a statement issued by the bank.

It added that underlying CPI inflation has been approaching the 2% target, with a high year-on-year rise in the producer price index, upward pressure beginning to spill over into consumer prices, and a continued rise in medium- to long-term inflation expectations.

The BoJ flagged risks from the situation in the Middle East, the pace of AI-related demand expansion, and developments in foreign exchange rates, warning that underlying inflation could deviate upward beyond the 2% price stability target.

It described financial conditions in Japan as accommodative and said the rate adjustment reflects efforts to calibrate the degree of monetary accommodation from the perspective of sustainably and stably achieving that target.

The central bank has been working to normalize monetary policy after holding interest rates near or below zero for decades in an effort to encourage borrowing and spending and pull the economy out of prolonged deflation.

Inflationary pressure has also been building on account of the war in Iran, which has pushed oil prices sharply higher, a significant strain for Japan given its near-total reliance on imported oil.

The BoJ said accommodative financial conditions are expected to be maintained and will continue to firmly support economic activity.

It added that it will keep raising the policy rate and adjusting the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions, while weighing the timing and pace of adjustment against the likelihood of the baseline scenario and the risks around it.

Stabilizing underlying CPI inflation at around 2%, it said, is becoming increasingly important.

The move follows a similar rate hike by the US Federal Reserve earlier in the week, its first increase since 2023, aimed at containing persistently elevated inflation. Washington has also been urging Tokyo to raise rates amid concerns over the yen's weakness.

The two countries recently carried out a joint intervention to support the yen, which is currently trading at around 155 to the US dollar, having crossed above 160 earlier this year.

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