Bank of Japan Raises Rate to 1.25% Amid U.S. Pressure and Inflation Risks

The Bank of Japan’s widely expected move followed an unusual campaign by Treasury Secretary Scott Bessent for higher rates.

· Rate hike: The Bank of Japan (BOJ) raised its policy rate from 1.00% to 1.25%, the highest level in 31 years.

· Market-expected move: The increase was widely anticipated as Japanese prices have risen steadily and underlying inflation has approached the BOJ's 2% target.

· U.S. pressure: U.S. Treasury Secretary Scott Bessent publicly urged Tokyo to tighten monetary policy and made unusually detailed comments about the BOJ's expected decision.

· Concerns over independence: Economists said U.S. comments created an impression that Japan's independent central bank could be influenced by external political pressure.

· Japanese government pressure: Prime Minister Sanae Takaichi has pushed for lower interest rates to support higher government spending and avoid increasing the government's debt-servicing burden.

· Government bond yields: Japan's 10-year government bond yield recently reached a three-decade high, reflecting investor concerns over fiscal and monetary policy.

· BOJ vote: Seven of nine BOJ board members supported the rate increase. The two dissenters were appointed by Prime Minister Takaichi.

· Governor Ueda's position: BOJ Governor Kazuo Ueda declined to comment directly on Bessent's remarks but stressed the importance of maintaining close coordination with the government while preserving the central bank's independence.

· Yen weakness: Higher U.S. interest rates had attracted capital away from Japan, contributing to a multi-decade low for the yen against the dollar.

· Currency intervention: The United States and Japan jointly intervened in the foreign-exchange market in July to support the yen.

· Inflation risks: The BOJ sees rising risks from a weaker yen, which increases import costs, and from higher global energy prices.

· Middle East impact: Japan, which has historically sourced almost all of its oil from the Middle East, has been forced to obtain more expensive supplies from the United States and other sources amid the Iran war.

· Oil-price pressure: Crude oil has recently risen above $100/barrel, increasing the risk of imported inflation for Japan.

· BOJ's policy objective: Governor Ueda said monetary policy would continue to focus on establishing a firm and sustainable position around the 2% underlying inflation target.

· Further tightening possible: Capital Economics expects the BOJ to raise rates more rapidly than currently anticipated in coming months, although the future pace remains uncertain.

· Board composition: Two of the more hawkish BOJ board members are scheduled to leave next July, potentially changing the balance of views on future rate increases.

· Yen reaction: The yen, which had strengthened ahead of the meeting on expectations of a rate hike, weakened slightly after the decision, partly because the two dissenting votes raised questions about the pace of future tightening.

· Competing political pressures: Analysts suggest pressure from Washington could indirectly counter the Japanese government's efforts to restrain BOJ rate increases.

· Potential policy effect: According to Nomura Research Institute economist Takahide Kiuchi, the competing pressures from Washington and Tokyo could ultimately give the BOJ greater freedom to determine the pace of future rate hikes.

· Key significance: The rate increase marks a further step away from Japan's decades-long near-zero interest-rate policy, while the BOJ must balance inflation and yen weakness against government concerns over borrowing costs and economic growth.

[ABS News Service/18.09.2026]

The Bank of Japan raised interest rates on Friday in a closely watched move that followed unusual scrutiny by the Trump administration.

Japan’s central bank moved its policy rate from 1 percent to 1.25 percent, the highest level in 31 years in a country that has long combated stagnant prices with near-zero interest rates.

Markets had widely expected the bank to raise rates at its September meeting, as prices in Japan have climbed steadily in recent years. It followed rate hikes from the Federal Reserve on Wednesday and the European Central Bank last week, as countries grapple with rising energy prices from the war in the Middle East.

U.S. Treasury Secretary Scott Bessent publicly pressured Tokyo to tighten policy. Speaking at an event in Texas last week, Mr. Bessent even suggested that he had inside knowledge of the bank’s plans to raise rates.

The Bank of Japan “already had very good reason to raise interest rates,” said Izumi Devalier, Bank of America’s chief Japan economist. But recent rhetoric from the United States creates the impression that Japan’s central bank, which is independent by law, “was co-opted into policy,” she said. “It’s not good for monetary policy.”

At the same time, the Japanese government has pushed in the opposite direction.

Prime Minister Sanae Takaichi has leaned on the Bank of Japan to keep interest rates low as she seeks to fund higher government spending without alarming investors about Japan’s ability to pay its debts. This month, yields on 10-year Japanese government bonds climbed to a three-decade high.

Seven of the Bank of Japan’s nine board members voted to raise interest rates. The two dissenters were both appointed by Ms. Takaichi.

At a news conference on Friday, the Bank of Japan governor, Kazuo Ueda, declined to comment on Mr. Bessent’s remarks about Japanese economic policy. While preserving the central bank’s independence, he said, “it is important to maintain close coordination” with the government.

The Takaichi administration’s push for lower rates has put it at odds with Mr. Bessent. He has relayed frustrations to Japan’s finance minister about low interest rates weighing on the yen. The Japanese currency fell to a multi-decade low against the dollar, as higher interest rates in the United States drew capital out of Japan.

In July, the United States and Japan jointly intervened in the foreign exchange market to prop up the Japanese currency. Mr. Bessent followed the intervention by saying in an interview that he was sure the Bank of Japan would “do the right thing” at its upcoming meeting.

Mr. Bessent escalated that rhetoric in recent weeks, daring traders to bet against the yen. “When we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do,” he said at an event at Southern Methodist University. “I am the house now,” he said.

Japan’s finance minister, Satsuki Katayama, said that Mr. Bessent’s remarks sounded “a bit scary” when translated into Japanese.

For months, Mr. Ueda has signaled that so-called underlying inflation — the long-term rate of price changes after excluding temporary shocks — is nearing the central bank’s 2 percent target.

“Now that underlying inflation is at 2 percent, you actually want to be much more vigilant about upside inflation risks,” said Ms. Devalier. That is because “now you have to contend with the risk that inflation doesn’t stop at 2 percent; it just continues to head higher and overshoots the target,” she said.

The main inflation risks now are a weaker yen, which makes imports more expensive, and higher prices stemming from turmoil in the energy markets. Japan has historically purchased virtually all its oil from the Middle East, but this year has been forced to turn to more expensive supplies from the United States and elsewhere.

Oil prices have soared to over $100 a barrel in recent days over fears that a drone attack on a critical pipeline in Saudi Arabia could further disrupt Persian Gulf energy supplies.

Mr. Ueda said on Friday that the Bank of Japan would continue to set monetary policy with the goal of “establishing a firm foothold” at its 2 percent underlying inflation target. Currency developments and impacts from the Iran war were among factors expected to push inflation higher over the medium and long term, he said.

Marcel Thieliant, head of Asia Pacific at the economic research firm Capital Economics, said he expected the Bank of Japan to tighten policy more rapidly than most anticipate in the coming months. But Ms. Takaichi’s efforts to steer the Bank of Japan to keep interest rates low “bore fruit,” he said, with her two appointees voting to leave rates unchanged.

With the two most hawkish board members set to depart next July, its composition could tilt further against rate increases, Mr. Thieliant said.

In the weeks leading up to the meeting, the yen had strengthened against the dollar in anticipation of a rate increase. The Japanese currency weakened slightly on Friday, as analysts said the two dissenting votes raised doubts about the pace of further tightening.

Takahide Kiuchi, executive economist at Nomura Research Institute, said competing pressures from Washington and Tokyo could ultimately give the central bank greater freedom to act.

“Treasury Secretary Bessent’s remarks might function less as direct pressure on the B.O.J. and more as a check on the Takaichi administration, which has been quietly restraining B.O.J. rate hikes behind the scenes,” Mr. Kiuchi said. As a result, the Bank of Japan “is effectively gaining a free hand to execute rate hikes or accelerate their pace.”