Bank of Japan Raises Interest Rate to 31-Year High

Economists expect the Bank of Japan (BOJ) to maintain a faster pace of interest rate increases following its recent decision.

The BOJ raised its policy interest rate to a 31-year high of 1.25 percent from 1.0 percent at a monetary policy meeting on Friday, September 18, 2026. This decision marks the first increase in three months, representing the shortest interval between hikes since the BOJ ended a decade of unorthodox monetary easing in March 2024.

The Policy Board voted 7-2 for the 0.25 percentage point increase. Takeshi Minami, chief strategist at Norinchukin Research Institute, anticipates the BOJ will continue raising its rate by a quarter percentage point every three months, a quicker pace than the previous once every six months. Minami expects the rate to reach 1.75 percent to counter higher-than-expected inflation in the second half of fiscal 2026.

Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, believes the BOJ has no choice but to accelerate the pace of rate increases, projecting a terminal rate of 1.5 percent, potentially rising to 2 percent if the Middle East conflict escalates. Japan is experiencing a recovery in consumer purchasing power, driven by wage increases exceeding 5 percent for the third consecutive year in 2026.

Companies are increasingly passing high input costs to consumers, while a stubbornly weak yen and surging crude oil prices from the Middle East conflict keep import costs elevated. The yen initially pared declines after the Nikkei newspaper reported the BOJ conducted a rate check, a potential precursor to intervention. The full extent of the tightening course remains unclear.