Japan’s Central Bank Raises Interest Rate to 1.25%, a 31-Year High

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Japan's Central Bank Raises Interest Rate to 1.25%, a 31-Year High

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TOKYO — On Friday, September 18, 2026, the Bank of Japan (BoJ) raised its benchmark interest rate by 0.25 percentage points, from 1.0% to 1.25%. This adjustment pushes borrowing costs to their highest point in 31 years, a notable shift for a nation that has maintained ultra-low or negative interest rates for decades to combat deflation and stimulate economic growth.

The decision, which was widely anticipated in global markets, comes as Japan grapples with rising inflation, which has been influenced by factors such as increasing energy prices and global supply chain pressures. In August 2026, Japan’s annual inflation rate held steady at 1.9%, remaining near its highest level since December 2025. Core consumer inflation, excluding fresh food, also rose by 1.7% in August. BoJ Executive Director Koji Nakamura noted that a shrinking labor pool is contributing to rising wages, a structural factor affecting inflation.

This rate hike aligns the BoJ with other major central banks, including the U.S. Federal Reserve and the European Central Bank, which have also tightened their monetary policies recently to curb inflation. The Federal Reserve’s rate hike earlier in the week, and the prospect of further increases, added pressure on the BoJ to act to prevent a widening interest rate gap that could weaken the yen and increase import costs.

BoJ Governor Kazuo Ueda stated that the central bank’s policy focus has shifted from boosting inflation to ensuring it remains anchored at 2%. While the policy committee’s vote to raise rates was not unanimous, with two members dissenting, Ueda did not rule out the possibility of further rate increases, emphasizing a data-dependent approach.

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