Bank of Japan lifts policy rate to 1.25%

The Bank of Japan raised its policy interest rate to 1.25% on Friday, the highest level since 1995. The board approved the increase by a 7-2 vote. This is the sixth rate rise since the central bank began tightening in March 2024, when the policy rate was -0.1%.

Board members Toichiro Asada and Ayano Sato voted against the decision. Market pricing had largely anticipated the increase ahead of the meeting’s conclusion.

The BOJ’s policy statement noted that underlying consumer price inflation has been approaching the bank’s 2% target and that financial conditions remain accommodative. The statement added that the bank will continue to raise the policy interest rate and adjust monetary accommodation in response to developments in economic activity, prices, markets and liquidity.

The rate increase follows recent actions by other major central banks. The U.S. Federal Reserve raised its target range to 3.75%–4.00% earlier this week in a unanimous vote. The European Central Bank raised its key rates by 25 basis points last week, taking the deposit rate to 2.50%. Japan’s policy rate remains below those of the United States and the euro area.

Officials cited higher energy costs as a factor behind global price pressures. Japan imported about 94% of its crude oil from the Middle East in 2025, with most shipments passing through the Strait of Hormuz. Disruptions related to the war in Iran have reduced flows and pushed fuel costs higher this year.

Japan’s headline inflation was 1.9% in August, while core inflation excluding fresh food fell slightly to 1.7% from 1.8% the prior month.

Tokyo and Washington intervened jointly in currency markets in August after the yen fell to a 40-year low. That intervention was the first coordinated action between the two countries since 2011.

The Bank of England held its policy rate at 3.75% on Friday. Three of nine Bank of England policymakers favored raising the rate to 4%. Bank Governor Andrew Bailey noted that higher global energy costs have so far had a limited effect on price and wage setting in the U.K.

Economists polled by Reuters expect Japanese interest rates to rise further, with median projections near 1.5% by the end of March 2027 and about 1.75% by the second quarter of 2027. The split vote at the BOJ reflects differing views among board members on the pace of future rate increases.