Japan's central bank raises benchmark interest rate to 1.25%, the
highest in 31 years
[September 18, 2026] By
YURI KAGEYAMA
TOKYO (AP) — Japan’s central bank on Friday raised the benchmark
interest rate to 1.25% from 1.0%, a 31-year-high.
The Bank of Japan has been trying to normalize monetary policy after
decades of keeping interest rates near or below zero to try to encourage
more borrowing and spending to counter deflation and pull Japan's
economy out of the doldrums.
The rate increase in the uncollateralized overnight call rate, a
short-term rate, was expected at the end of the two-day monetary policy
board meeting and has widely figured into recent global markets.
Bank of Japan Gov. Kazuo Ueda said the decision was reached after
looking at various risks like the war in Iran, the expanding market
demand for artificial intelligence and currency fluctuations.
“The Japanese economy is continuing to recover gradually,” he told
reporters, while noting inflation was close to the targeted 2%.
Analysts have said another increase was possible later this year or
early next year. When asked about further hikes, Ueda stressed more time
is needed to see if price increases stay stable, along with needing to
monitor wage growth and other risk factors.
Two of the nine-member board dissented, expressing concerns about the
strength of Japan's economic growth, according to Ueda.
The U.S. Federal Reserve also raised its key rate this week. The U.S.
increase Wednesday, the first since 2023, was made in an effort to quell
stubbornly high inflation.
The U.S. has also been pressuring Japan to raise rates because of
concerns about the weakening yen.
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A Japanese flag flutters at the Bank of Japan headquarters in Tokyo,
July 29, 2022. (AP Photo/Shuji Kajiyama, File)
 The nations intervened together
recently to prop up the yen. Despite the Bank of Japan's move, the
U.S. dollar grew stronger, momentarily reaching above 157 yen. It
reached above 160 yen earlier this year.
The Bank of Japan has set a target inflation rate of about 2%.
Inflation is about that now in Japan, although some consumers
complain that the recent surge in prices is too much, especially in
gas and oil-related products.
“With crude oil prices remaining elevated, the Bank of Japan is
expected to implement an additional rate hike sooner rather than
later to limit the risk that consumer inflation exceeds the
underlying inflation rate,” said Harumi Taguchi, an economist at S&P
Global Market Intelligence.
Higher rates may also weigh on the economy because of heavier
borrowing costs for small and medium-sized enterprises, as well as
higher mortgages, she added.
Analysts are also worried about the aggressive public spending
promised by the government of Prime Minister Sanae Takaichi, such as
tax cuts and aggressive defense investments, when public debt is
already ballooning.
Tokyo's benchmark Nikkei 225 rose after the Bank of Japan decision
was announced, edging up 1.4%
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