The Bank of Japan Prepares to Raise Its Policy Rate to 1.25%, the Highest Level Since 1995

The Bank of Japan is set to raise its policy rate from 1.0 percent to 1.25 percent at its meeting on September 17 and 18. The Japan Times reported that the last time the rate stood at that level was April 1995. Nikkei reported that the move would come three months after the June increase, the shortest interval of the tightening cycle that began in March 2024, and that the central bank wants to contain upside risks to prices caused by expensive crude oil and a weak yen.

Japanese reporting is consistent on the reasoning. Mainichi's account described a board moving to suppress price overshoot rather than responding to strong domestic demand. Japan imports nearly all of its crude, so Brent near $106 a barrel combined with a soft currency raises the yen cost of energy twice over. Raising rates is the one instrument that addresses the currency leg of that problem.

The timing places the Bank of Japan and the Federal Reserve in the same week and pointing the same direction. That is a new configuration. For most of the past three decades Japanese policy supplied the cheap funding that investors borrowed to buy higher-yielding assets elsewhere. A policy rate at levels last seen in 1995, with more increases expected, narrows that gap from the Japanese side even as American rates also rise.

For savers in Japan the shift restores something that was absent for a generation, which is a positive nominal return on cash. For the Japanese government, which carries the largest debt burden relative to output among major economies, each increase raises the cost of rolling that debt.