The BoJ hikes to 1.25%, the yen does not follow — what Tokyo really said
On 18 September, the Bank of Japan raised its rate to 1.25%, the highest since 1995, by a 7-2 vote. But with no timetable and no terminal rate, the market heard caution and the yen fell. The two dissents, underlying inflation, the gap with the Fed, Takaichi's stimulus and three scenarios before 30 October.
On Friday 18 September, the Bank of Japan raised its policy rate to 1.25%, the highest since 1995. On paper, a hawkish move. On the screens, the yen did not move in the right direction. The whole significance of the decision lies in that gap between the gesture and the tone.
What was decided
The Policy Board voted 7 to 2 to guide the uncollateralised overnight call rate "around 1.25%", up from 1% since June. The rate on the Complementary Deposit Facility also rises to 1.25% and the basic loan rate to 1.5%. The new rates apply from 24 September.
This is the second hike in three months. It was expected: every economist polled by Bloomberg had anticipated it, and Governor Kazuo Ueda had hinted at it in early September. The surprise therefore came not from the decision, but from what surrounded it.
Two dissents, and serious arguments
Toichiro Asada and Ayano Sato voted to hold at 1%. Their reasons, published in the statement, are not those of doves on principle:
- Asada considers that with inflation excluding fresh food recently below 2%, the economy cannot be called strong.
- Sato judges that the economy and prices have not accelerated noticeably compared with the previous period, and that a hike was therefore not appropriate now.
A split vote does not cancel a hike. But it sets a limit on the pace: as long as those two voices stay opposed, the Board will find it hard to deliver hikes at every meeting.
Why hike with inflation below 2%
The paradox is only apparent. The BoJ does not steer the monthly figure; it steers underlying inflation and expectations. Its statement lines up four arguments:
| Indicator | BoJ assessment | Direction |
|---|---|---|
| Inflation excluding fresh food | Between 1.5% and 2%, rising moderately; 1.7% in August | → |
| Underlying inflation | "Approaching 2%" | ↑ |
| Producer prices | Sharp rise over a year: AI-related demand, expensive oil, weak yen | ↑ |
| Wages | Increases continue to be passed through into selling prices | ↑ |
| Medium-term expectations | "Have continued to rise" | ↑ |
Above all, the BoJ projects inflation excluding fresh food "clearly above 2%" from the second half of fiscal 2026, driven by oil, semiconductors and the weaker yen. The risk it names is no longer missing its target but overshooting it: firms are more willing to raise wages and prices, and expectations are climbing.
The BoJ points out that real interest rates remain low and that financial conditions are "accommodative". In other words, even at 1.25%, it does not consider itself restrictive. That is the argument that makes the rest of the cycle credible.
The yen paradox
A rate hike should support the currency. It did not. To understand why, you have to go back over the summer:
- In July, the yen fell to nearly 164 per dollar, not far from its weakest in some forty years.
- Between 30 July and 26 August, Tokyo spent a record ¥15.4 trillion buying it back, in interventions in which the United States took part.
- On Wednesday 16 September, two days before the BoJ, the Fed itself raised rates to 3.75–4%. The rate gap between the two countries therefore remains around 2.75 points.
It is this gap that feeds the carry trade: borrowing in yen cheaply to invest in better-paid dollars. A 25-basis-point hike does not close it. To reverse the trend, the market needed a signal about what comes next. It did not get one.
At his press conference, Kazuo Ueda explained that the phase of monetary policy had changed as underlying inflation approached 2%, but that it was difficult to determine the terminal rate, whose level would only become clear after the fact. He also reiterated that the BoJ does not conduct policy to target the level of the yen. No timetable, no end point, no explicit defence of the currency: strategists read a less aggressive hike than hoped, and the yen fell.
A rate hike only "bites" if financial conditions tighten. A falling yen is the opposite: easing conditions, rising import prices, and therefore more inflation to fight. By letting the market take away its caution, the BoJ partly undid the effect of its own move.
Tokyo spends, the BoJ tightens
The decision lands in a particular fiscal context. Prime Minister Sanae Takaichi's programme, a "responsible and proactive" fiscal policy, provides for more growth investment and a cut in consumption tax on food. Stimulus on one side, tightening on the other: the two levers pull in opposite directions.
The bond market already reflects it: the 10-year JGB yield is at its highest in some thirty years. At the G20, US Treasury Secretary Scott Bessent argued for "monetary normalisation and fiscal discipline", while specifying that monetary policy remained a Japanese prerogative.
Three scenarios between now and 30 October
On 30 October, the BoJ will also publish its new economic projections. The reactions indicated are directions of first reaction, not targets.
The October projections confirm inflation durably above 2%, and the communication sets a course. The market prices in another near-term hike, the carry trade becomes costlier and the yen recovers.
The BoJ keeps the 18 September line: a hike is possible, but with no date. The rate gap with the United States remains the dominant variable, the yen stays weak and the threat of fresh intervention returns as 164 approaches.
A fresh rise in oil linked to the Middle East, or a Fed that keeps hiking, widens the rate gap further. The BoJ finds itself caught between imported inflation and an economy slowed by energy costs: the most uncomfortable scenario for the yen.
What would invalidate this reading
- The dissenters rallying. If Asada or Sato join the majority in October, the pace can accelerate without the tone changing.
- Disappointing inflation. If inflation excluding fresh food does not cross 2% as forecast, the BoJ's projection loses its main support.
- Oil receding. A Middle East de-escalation would reduce pressure on import prices and buy the BoJ time.
Sources
- Bank of Japan — Change in the Guideline for Money Market Operations, 18 September 2026
- UPI — 1.25% rate, August CPI, yen interventions
- FXStreet — BoJ recap: not as hawkish as expected
- Bloomberg — split vote weighs on the yen
- Al Jazeera — June hike and international context
- The Japan Times — Ueda hints at a September hike
- Federal Reserve — FOMC statement, 16 September 2026
- Bank of Japan — meeting calendar