BOJ Raises Rate to 31-Year High in Split Decision

Bank of Japan policymakers signalled growing support for further interest-rate hikes, with some calling for faster increases or for rates to be brought closer to the central bank’s “goal” relatively soon. The views, outlined in a summary of opinions from the September meeting, reinforced expectations of another hike as inflationary pressures persist. One policymaker said the central bank should accelerate tightening if prices show signs of exceeding its outlook, while another argued rates should move closer to the neutral level to preserve room to respond to economic shocks. Several members noted underlying inflation had reached or was nearing the 2% target, with some warning of persistent price pressures. Policymakers also highlighted upside risks from elevated crude oil prices amid Middle East tensions. The BoJ raised its policy rate to 1.25% in September, with Governor signaling a greater focus on preventing inflation from overshooting the target.

It was appropriate for the Bank of Japan to continue raising policy interest rates and gradually adjust monetary accommodation, July minutes showed, as underlying CPI inflation neared 2% and financial conditions stayed accommodative. Members stressed preemptive action against upside risks to avoid rapid hikes later, noting the rate remains below the neutral range. One member observed markets expect hikes every six months, but warned the pace could be faster if inflation risks intensify. The timing of adjustments should weigh baseline outlooks, risks from Middle East tensions, AI demand, and FX moves. Policymakers emphasised a shift from lifting inflation to anchoring it at 2%, warning that unchecked upside risks could harm the economy and compel sharper moves. One cautioned that delayed tightening could force double shocks, underscoring the need for nimble policy.

The Bank of Japan raised its key short-term rate by 25bps to 1.25% in a 7-2 vote at its September meeting, taking borrowing costs to their highest level since April 1995. The split decision highlighted growing divisions over the pace of policy normalization as the BOJ responds to persistent inflation, including higher oil prices. While most policymakers signaled support for further rate increases, Toichiro Asada and Ayano Sato dissented, indicating resistance to a faster tightening cycle. The hike came just three months after the previous increase, the shortest interval between hikes since 1990, and followed increased pressure from Washington, including calls from US Treasury Secretary Scott Bessent for higher rates. Looking ahead, the BOJ expects inflation to remain above the 2% target in the coming years, with analysts forecasting price growth to approach 3% by early next year.