Bank of Japan Raises Rates to 31-Year High on September 18, Pressured by US and PM

The Bank of Japan raised its policy rate by 25 basis points to 1.25% on Friday, marking the highest level since 1995 and the second hike in three months. The decision was approved 7-2, with two board members appointed by Prime Minister Sanae Takaichi dissenting. Governor Kazuo Ueda now navigates conflicting demands: US Treasury Secretary Scott Bessent wants faster tightening to support the yen, while Takaichi prioritizes economic growth over rate increases.

Why the BOJ moved faster than before

The BOJ raised rates three months after its last hike, compared to six months previously, signaling an acceleration in monetary tightening. Nearly 90% of economists surveyed by CNBC expected the 25-basis-point increase. Governor Ueda said at the press conference that the central bank remains prepared to raise rates further and adjust policy as conditions evolve. The move came as Japan’s core inflation eased to 1.7% in August, down from 1.8% in July, marking the first decline in four months.

Political pressure from Washington and Tokyo

US Treasury Secretary Scott Bessent has publicly urged the BOJ to tighten faster to support the yen and prevent spillover into US debt markets. Prime Minister Takaichi, who appointed two of the nine policy board members, wants to prioritize economic growth and has adjusted Japan’s debt targets to create room for increased spending. The two dissenting votes on Friday came from board members Toichiro Asada and Ayano Sato, both appointed by Takaichi earlier this year. Ueda faces conflicting pressures from both officials, making future policy decisions increasingly difficult.

Market reaction and the weak yen puzzle

Despite the rate hike, the yen weakened to 157 against the US dollar, down from 156 earlier in the day. The currency fell 1.3% in Tokyo trading by 7 p.m. local time on Friday. Traders appeared concerned that the 7-2 vote signaled slower future hikes than expected. The Nikkei 225 Index rose 1.38% to 65,019 on the news, with technology stocks leading gains. The benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947%, suggesting bond markets viewed the decision as less hawkish than anticipated.

What comes next for rate decisions

Economists surveyed by Bloomberg are split on timing, with December favored for the next hike, followed by January 2027. The outlook becomes murkier beyond early 2027, when two hawkish policy board members are set to leave in July. If Takaichi appoints two dovish replacements similar to Asada and Sato, the balance of power on the nine-member committee could shift significantly. About 80% of economists in a Bloomberg survey believe the government will find it harder to oppose further tightening after supporting the recent yen intervention, but political resistance remains a wild card.

Final Thoughts

The BOJ’s rate hike to 1.25% signals faster tightening, but the weak yen and internal dissent reveal deep political tensions. With Takaichi set to reshape the policy board next year, the pace of future hikes remains uncertain despite US pressure for faster action.

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