The Bank of Japan (BOJ) raised its key interest rate to 1.25% on September 18, marking a 0.25 percentage point increase. This is the highest level since 1995 and the first hike in three months, aimed at curbing inflationary pressures from rising international oil prices and a weakening yen.
During its monetary policy meeting, the BOJ decided to raise the target for the uncollateralized overnight call rate from 1.0% to 1.25%. Of the nine policy board members, seven voted in favor, while two opposed the decision.
Since ending its negative interest rate policy in March 2024, the BOJ has generally raised rates at six-month intervals, but this time the interval was shortened to three months.
In its statement, the BOJ cited geopolitical tensions in the Middle East, increased demand related to artificial intelligence (AI), and the weak yen as inflationary risks. It noted that price pressures observed in corporate transactions are beginning to affect consumer prices. While the BOJ previously assessed that the likelihood of such spillover was high, it now believes that the spillover has commenced.
The BOJ expressed concern that inflation could exceed its 2% target, considering rising wage and price increase trends among businesses and the long-term inflation expectations. It assessed that the current financial environment remains accommodative and reaffirmed its intention to continue raising the policy rate based on economic, price, and financial conditions.
However, board members Doichiro Asada and Ayano Sato voted against the rate hike. Asada argued that the consumer price index (CPI) excluding fresh food is below 2%, and the economic situation cannot be deemed robust. Sato contended that since the economic and price conditions have not accelerated significantly, raising rates at this time is inappropriate. Both members are considered cautious doves appointed by the administration of Sanae Takaichi.
Minoru Kiuchi, who has previously advocated against hasty rate increases, also attended the meeting. Following the rate hike decision, the yen weakened in the foreign exchange market, with the yen-dollar exchange rate rising to around 157 yen per dollar at one point.
In late July, the U.S. and Japanese governments intervened to support the yen when the exchange rate approached 164 yen per dollar. Following this, U.S. Treasury Secretary Scott Vessenet met with BOJ Governor Kazuo Ueda, expressing strong support for Japan's decisive market and financial policy measures to address the yen's significant undervaluation. Many in the market interpreted this as a push for the U.S. administration to raise interest rates.
The recent interest rate hikes by the U.S. and European central banks also appear to have influenced the BOJ's policy decision. The U.S. Federal Reserve raised its key interest rate on September 16 for the first time in three years and two months, while the European Central Bank raised rates again on September 10 after doing so in June. The widening interest rate gap with major countries could increase downward pressure on the yen, supporting the BOJ's decision to raise rates.
The BOJ estimates the neutral interest rate, which neither stimulates nor restrains the economy and prices, to be between 1.1% and 2.5%. With the current increase to 1.25%, the key interest rate has surpassed the lower end of this range. The Nihon Keizai Shimbun (Nikkei) noted that the BOJ is entering a phase where it must carefully monitor changes in the economy and financial environment.
Governor Ueda is expected to hold a press conference later in the afternoon to explain the rationale behind the rate hike and the future direction of policy.
* This article has been translated by AI.
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