Controversial Japanese Interest Rate Decision
September 18, 2026
After deliberating over two days for nearly five hours, the Bank of Japan Board rendered a 25-basis point hike of their short-term interest rate to 1.25%. The decision comes just three months after the previous increase and raises the cumulative change since last December to 75 basis points. The rate hadn’t been as high as the new level in 377 months, but the decision was tainted by appearances of political interference, the existence of two dissenting votes that opposed increasing the rate, and mixed remarks from Governor Ueda. A major background element coming into today’s decision was highly publicized pressure from the Trump administration pressing for the Bank of Japan to tighten policy faster and promote a stronger yen. There had been coordinated U.S. and Japanese foreign exchange market intervention recently to lift Japan’s currency. The catch in this strategy is that it’s been opposed by Japanese Prime Minister Takaichi, who since taking office 11 months ago has launched a stimulative fiscal policy. Low interest rates help finance that effort.
The two dissents from the BOJ rate hike were cast by Asado and Sato, each Takaichi appointees to the 9-person BOJ Board. The prime minister will have more opportunities in the coming year to tilt the Board’s predisposition in her favored direction. With this possibility, market reaction to the BOJ’s announcement was paradoxical. The yen weakened more than 1.0%, the 10-year JGB yield fell by a basis point even though 10-year sovereign debt yields rose elsewhere overnight by five basis points in the U.S., U.K. and Italy, eight basis pints in France and two bps in Germany. Also the Nikkei-225 Japanese stock market index closed up 1.4% versus declines today of more than 1% in major European bourses and smaller and more mixed results in major U.S. stock market barometers.
Japanese economic trends are more nuanced than U.S. Treasury Secretary Bessent would have the world believe. The BOJ dissents had this to say about their votes:
Asada Toichiro dissented, considering that, with the rate of increase in the CPI (all items less
fresh food) being below 2 percent recently, it could not necessarily be said that the economic situation
was strong, and it was therefore desirable for the Bank to maintain the guideline for money market
operations. Sato Ayano dissented, considering that current economic and price developments did not
appear to have substantially accelerated compared to before, and in this context, it was not appropriate
for the Bank to raise the policy interest rate at this time.
The characterization of Japanese economic growth as “moderate” has been generous. After expanding all of 1.3%in 2022, real GDP rose 0.7% in 2023, fell 0.2% in 2024, rebounded 1.1% last year and posted year-on-year growth of just 0.6% in the first half of 2026. Japanese consumer price inflation in August, coincidentally reported today, were well below this decade’s U.S. norms. Such rose 1.9 overall and when excluding both energy and food and by 1.7% in the core measure, which in Japan’s case includes energy. Forward guidance at BOJ Governor Ueda’s post-decision press conference threaded a needle, promising additional interest rate hikes in the future but also stressing a need for continuing accommodative financial market conditions to promote growth. The upside inflation risks have a significant external element: the Middle East war, a global rush to develop AI, and currency market developments.
It has taken 2.5 years for the BOJ interest rate to climb from a -0.1% cellar over the previous decade to the new current level. This month’s rate increase of 25 basis points merely matches similar September moves by the Federal Reserve and European Central Bank. Filling out the Group of Seven industrial economies, central banks in the U.K. and Canada still have not made their first tightening decision, but Japan’s policy interest rate continues to be significantly below the other levels.
Copyright 2026, Larry Greenberg. All rights reserved.
Tags: Bank of Japan
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