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Morning Edition · Friday, September 18, 2026Published at 1:18 AM EDT · New York
Bank of Japan lifts its policy rate to 1.25 percent, the highest since 1993
The increase comes two days after the Federal Reserve's own rate increase, and Japan's ten-year government bond yield has already climbed above 3 percent.
The Bank of Japan raised its policy rate by 0.25 percentage points to 1.25 percent on Friday, saying it acted because it sees inflation risks settling above its 2 percent target, according to the Financial Times. That is the highest Japanese policy rate since 1993 and the bank's first increase since June, as Al Jazeera reported.
The timing matters as much as the size of the move. The Federal Reserve raised its target range to 3.75 to 4.00 percent on Wednesday, its first increase since 2023, responding to inflation driven largely by higher oil prices. Japanese officials have faced open pressure from Washington to narrow the interest-rate gap that has weakened the yen, and The Japan Times noted that wage and price data, the currency's weakness and that American pressure all pointed toward the same decision. Japan's rate still sits below the European Central Bank's 2.5 percent.
Markets had already priced in the move. The ten-year Japanese government bond yield rose above 3 percent ahead of the meeting, and the yen traded near 156 per dollar after the announcement. The currency weakened rather than strengthened because traders judged the pace of tightening too slow to close the gap with the United States.
Measured against consumer prices, a 1.25 percent policy rate still leaves Japan's real interest rate below zero, so credit conditions remain loose by historical standards. That is the legacy of a decade of suppressed yields: investors built positions in long-dated bonds, property and currency carry trades on the assumption that rates would stay near zero indefinitely, and that assumption is now being corrected through the bond market and the currency rather than through policy statements. Globes reported that JPMorgan Chase chief executive Jamie Dimon, responding to the increase, said he is not convinced inflation is under control.
What this means
Japan is the world's largest creditor nation, so its domestic yields set the alternative return for Japanese insurers, banks and pension funds that hold trillions of dollars of foreign bonds. A ten-year yield above 3 percent at home makes hedged purchases of United States and European debt less attractive, which removes a buyer from those markets and pushes up long-term borrowing costs outside Japan. The Japanese government, which carries the heaviest debt load relative to output among large advanced economies, pays more on every new bond it issues.
What to watch
- Whether Japanese life insurers and banks report net sales of foreign bonds in the coming months, which would show the repatriation channel operating rather than being merely predicted.
- The yen's direction from about 156 per dollar. Continued weakness after a hike would signal that markets expect the Bank of Japan to stay behind the Federal Reserve, keeping imported inflation high.
- Japanese government debt-service projections in the next budget request, which translate the 3 percent long yield into a fiscal number.
Observations to monitor, not financial advice.
Synthesized from: Financial Times · Al Jazeera · The Japan Times · Globes
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Comments
2Sep 18, 5:18 AM · edited
At 1.25 percent, the policy rate gap between Japan and the United States remains at least 250 basis points, leaving yen carry trades intact and making a material yen reversal from this hike alone unlikely.
Sep 18, 6:00 AM · edited
JGB ten year above 3 percent makes hedged US Treasuries unattractive for Japanese life insurers; the institutional repatriation sequence from prior BoJ cycles typically runs two to three quarters.