BOJ raises rate to 1.25%, tracking US and European moves

On Friday, the BOJ lifted its benchmark rate to 1.25% — the highest since 1995 — citing energy costs from the conflict in Iran that are squeezing economies.

The vote was 7-2, with Toichiro Asada and Ayano Sato in opposition. Financial markets had fully anticipated the outcome ahead of the announcement.

Three Central Banks, One Energy Shock

This increase came during a packed week for central bank decisions. The US Federal Reserve raised its target range to 3.75%-4.00% on Wednesday, with all members voting in favour — its first hike since 2023.

The European Central Bank had acted a week prior, increasing each of its three main rates by 25 basis points and setting its deposit rate at 2.50%.

After Friday's step, Japan's rate remains significantly lower than both counterparts. This marks the sixth hike in the current cycle. The benchmark stood at -0.1% when the tightening phase started in March 2024.

The shared factor is energy. In 2025, Japan sourced 94% of its crude from the Middle East, with the bulk transiting the Strait of Hormuz.

The conflict in Iran has interrupted those flows and pushed prices higher this year. Japan's headline inflation was 1.9% in August, while core inflation slipped to 1.7% from 1.8%.

“As for the future conduct of monetary policy, given that underlying CPI inflation has been approaching 2 percent and financial conditions have been accommodative, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions,” the BOJ said in its statement.

The UK Sits This One Out

The United Kingdom took a different path. The Bank of England kept its rate unchanged at 3.75% for the sixth consecutive meeting, while three out of nine policymakers voted for a rise to 4%.

“So far, higher global energy costs have had a limited effect on price and wage setting in the U.K,” Bank of England Governor Andrew Bailey said.

UK inflation reached a five-month peak of 3.1% in August, BeInCrypto noted. However, the yen's weakness creates a burden absent in the UK. Japan and the US coordinated intervention in August after the currency fell to a 40-year trough.

That joint move was the first since 2011. According to a Reuters survey of economists, rates are projected to reach 1.5% by March 2027 and 1.75% in the following quarter.