BoJ hikes rate to 1.25% as expected, with 7-2 split

A 7-2 vote, with Toichiro Asada and Ayano Sato dissenting, showed the board is not united in its stance, possibly limiting how aggressively markets expect further tightening beyond current moves.

The Bank's forward guidance, saying it will keep raising rates based on economic, price and financial developments, signals that the increase is not a one-off.

The Bank's attachment noted underlying CPI is set to accelerate clearly above 2% from the second half of fiscal 2026, a hawkish signal for JGB yields if it materialises, but it also cited the Middle East and AI-related demand as two-sided risks that could shift that path. With accommodative financial conditions still expected after the hike, the outlook is for a gradual tightening cycle, not an aggressive one.

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As widely anticipated, the BoJ raised rates and indicated further increases, although two board members believed the move was premature.

The key points of the announcement:

• The Policy Board voted 7-2 to lift the policy rate to about 1.25% from September 24, with the complementary deposit facility rate at 1.25% and the basic loan rate at 1.5%
• Dissenting members Toichiro Asada and Ayano Sato argued respectively that CPI ex fresh food is still below 2% and that price and economic activity have not accelerated substantially
• The Bank described Japan's economy as recovering moderately, with weakness partly due to the Middle East, and expected continued moderate growth backed by government measures and rising global AI demand
• Underlying CPI has been nearing 2%, and the Bank's attachment forecast CPI ex fresh food to accelerate clearly above 2% from H2 FY2026 before easing back to around 2% later in the projection
• The Bank highlighted upside risks to underlying inflation from firms increasingly raising wages and prices and from rising medium- to long-term inflation expectations
• The BoJ stated it will keep raising rates and adjusting accommodation, monitoring the Middle East, AI demand and forex moves to decide the timing and pace of further hikes

The Bank of Japan on Friday raised its policy rate by 25 basis points to approximately 1.25% in a 7-2 vote, bringing it to the highest since 1993. The new rate takes effect September 24, with the complementary deposit facility at 1.25% and the basic loan rate at 1.5%. Toichiro Asada and Ayano Sato dissented; Asada said CPI ex fresh food is still below 2% and the economy cannot be described as strong, while Sato said economic and price developments have not substantially accelerated and a rate hike now was inappropriate.

Japan's economy is recovering moderately but shows some weakness partly due to the Middle East, the Bank said. Growth is seen continuing at a moderate pace, supported by government measures and rising global AI demand, though the Middle East will still weigh. On prices, producer price inflation remains high year-on-year from AI demand, high crude oil and yen depreciation, while underlying CPI has been rising moderately as business-to-business price pressure passes through to consumer prices and firms keep passing on wage gains.

The Bank's economic assessment projected CPI ex fresh food to accelerate clearly above 2% from H2 FY2026, driven by pass-through of past crude oil rises, higher semiconductor and AI prices, and yen depreciation boosting durable goods prices. The increase is expected to ease back to around 2% in the latter half of the July 2026 Outlook projection period as the effect of high crude oil fades. Medium- to long-term inflation expectations have continued to rise, and underlying CPI is expected to reach levels consistent with the 2% target between H2 FY2026 and FY2027, staying there after.

The Bank noted two-way risks around that outlook, saying attention is needed on the Middle East, AI demand expansion and forex developments. It specifically flagged the risk of underlying CPI rising above 2% due to firms' shifting toward raising wages and prices and rising inflation expectations. Board members Hajime Takata and Naoki Tamura opposed the price outlook description in the attachment, both arguing that CPI increases, including underlying, had already generally reached the price stability target.

Financial conditions remain accommodative, with low real rates, rising corporate fund demand, proactive lending attitudes, and favourable issuance conditions for CP and corporate bonds, the Bank said. Accommodative conditions are expected to persist after this rate change, continuing to support the economy. On future policy, the Bank said that given underlying CPI is approaching 2% and financial conditions remain accommodative, it will keep raising the policy rate and adjusting accommodation, judging the timing and pace against activity, prices and financial conditions, including risks from the Middle East, AI demand and forex.

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BoJ Governor Ueda is scheduled to hold a press conference at 0630 GMT / 0230 US Eastern time.