Sunita Somvanshi
Japan's central bank raised its benchmark interest rate to 1.25% on September 18, 2026 — the highest level since 1995. The move was a 25-basis-point increase and was widely anticipated by markets. What surprised some observers was the reaction in currency markets: the yen weakened, rather than strengthened, in the hours after the decision. The reason is in the details of how the vote went and what the Bank of Japan said about future moves.
The decision
The Bank of Japan's policy board voted to raise the overnight call rate target to 1.25%. The decision was not unanimous: two board members voted to hold rates steady. Core inflation in Japan remained near the BOJ's 2% target in August, and the central bank cited persistent wage growth and a shrinking labour pool as structural pressures that support continued rate normalisation.
This puts the BOJ's policy rate at its highest point in 31 years. Japan spent decades at or near zero rates, and the current tightening cycle represents a fundamental shift in the country's monetary policy stance that has implications beyond Japan's borders.
Why the yen weakened
A rate hike usually strengthens a currency by making it more attractive to hold. The yen's post-decision weakness reflects two things. First, markets had fully priced in the 25-basis-point increase before the announcement — when an expected move happens, it often produces a "sell the news" effect. Second, and more importantly, the BOJ's guidance and the split vote were interpreted as relatively cautious. Two dissenting members voting to hold suggests the committee is not locked into a pre-set pace of increases, and traders read that as the BOJ being less aggressive about future hikes than some had expected.
That interpretation matters because currency moves are driven by interest-rate differentials — the gap between Japanese rates and rates elsewhere. If markets believe the BOJ will raise rates slowly, the gap with US and European rates narrows more gradually, limiting yen appreciation.
For Australian, US, and UK readers with yen exposure or Japan travel plans: a weaker yen makes Japan cheaper for foreign visitors and raises the cost of Japanese imports in local markets. The yen's path from here depends substantially on whether the BOJ signals a faster pace of hikes at future meetings.
What comes next
The BOJ's summary of opinions from the September 17-18 meeting is scheduled for release on October 1, 2026. That document will give more detail on why the two dissenting members wanted to hold rates, and what conditions they would need to see before voting for a further increase. The next policy decision meeting is the key watch event for yen investors.
Japan's rate at 1.25% is still low by global standards — the US Federal Reserve's benchmark rate is several percentage points higher — but the direction of travel matters as much as the absolute level. The BOJ has now raised rates multiple times in the current cycle, and each incremental increase reduces the yen-borrowing advantage that drove the carry trade for years.
Frequently Asked Questions
What is Japan's interest rate now?
The Bank of Japan raised its policy rate to 1.25% on September 18, 2026, a 25-basis-point increase. This is the highest the BOJ's benchmark rate has been since 1995, approximately 31 years.
Why did the yen fall after the BOJ rate hike?
Markets had largely priced in the increase before the decision. The yen weakened because traders focused on the split vote — two members voted to hold — and interpreted the BOJ's guidance as less aggressive on future hikes than expected. When a central bank signals a slower pace of tightening, it limits the expected interest-rate premium, reducing currency support.
How does the BOJ rate hike affect everyday people?
In Japan: higher rates increase borrowing costs for mortgages and business loans, while savers may earn more on deposits. Outside Japan: a weaker yen makes Japanese goods and travel cheaper for foreign buyers. For investors: the yen carry trade — borrowing in yen to invest in higher-yield assets — becomes less attractive as Japanese rates rise.
The BOJ's summary of opinions from this meeting is due October 1. The next policy meeting will be the clearest test of whether the central bank is prepared to continue raising rates. Check back for yen and inflation updates.
Related Karmactive coverage: Bank of England rate decision.
