Bank of Japan Expected to Raise Rates to 1.25% as Inflation Risks Persist

September 11, 2026

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Summary

The Bank of Japan is expected to raise its policy rate by 0.25 percentage points to 1.25% at its September 17-18 meeting. That would be the highest policy rate since April 1995. The move reflects growing confidence that underlying inflation is approaching the BOJ’s 2% target. Officials are also monitoring risks from oil prices, AI-related demand and the earlier weakness of the yen. Despite the expected hike, Japan’s real interest rates remain negative and financial conditions are still considered accommodative. The BOJ is likely to signal that further gradual increases could follow. However, policymakers are expected to avoid giving a fixed timetable or final target for rates. Read the full article for what the decision could mean for Japan’s economy, households and foreign residents.

BOJ likely to deliver another measured rate increase

The Bank of Japan is expected to raise its policy interest rate by 0.25 percentage points at its upcoming two-day monetary policy meeting on September 17-18, bringing the rate to 1.25%, according to several people familiar with the central bank’s thinking.

If implemented, the increase would mark the Bank of Japan’s first rate hike since June and its fastest move between increases since the previous six-month interval. A policy rate of 1.25% would also be the highest level recorded by the central bank since April 1995, underscoring the historic shift underway in Japan’s monetary policy.

The expected decision reflects growing confidence that Japan’s underlying inflation is approaching the Bank of Japan’s 2% target. At the same time, policymakers remain alert to risks that prices could rise more quickly than anticipated. These risks include higher crude oil prices linked to tensions in the Middle East, strong demand related to artificial intelligence investment and the inflationary impact of past yen weakness.

Inflation and the yen remain key considerations

Japan’s central bank has been gradually moving away from the ultra-loose monetary settings that defined the country’s response to years of deflation and weak wage growth. Although the yen has recently strengthened sharply, it had earlier fallen to almost 164 against the U.S. dollar in late July. Officials are concerned that the earlier period of yen weakness could continue to push up consumer prices as its effects pass through the economy.

Price increases are also expected to become more visible through the autumn, as companies implement further hikes across food, services and other goods. The BOJ’s July economic outlook identified rising costs associated with geopolitical tensions, stronger AI-related demand and exchange-rate movements as important upside risks to inflation.

However, sources said the price trend remains broadly in line with the central bank’s expectations. Inflation is not accelerating uncontrollably, and officials do not appear to believe that a larger 0.5 percentage-point increase is necessary. The likely 0.25 percentage-point move would therefore be consistent with the BOJ’s gradual and carefully calibrated approach.

Financial conditions are still considered accommodative

Despite previous rate increases, Japan’s financial environment remains accommodative by international standards. Real interest rates for one- and two-year maturities are still negative, meaning borrowing costs adjusted for inflation remain below zero. One BOJ policymaker recently argued that negative real rates should be eliminated sooner because Japan is no longer experiencing deflation.

That view is not universally shared within the policy board. Some members have expressed caution about raising rates too quickly, with one policymaker voting against the June increase. The central bank is therefore expected to emphasize that future decisions will depend on incoming data, particularly wage growth, consumption, inflation expectations and the broader economic outlook.

More rate increases possible, but no fixed timetable

Following the expected move to 1.25%, the BOJ is likely to indicate that additional increases remain possible if underlying inflation continues to settle around 2%. Governor Kazuo Ueda previously said the bank could accelerate the pace of rate hikes if financial conditions became excessively easy relative to the inflation outlook.

Still, officials are expected to avoid committing to a specific date for the next increase or identifying a precise terminal rate. The BOJ has not established a predetermined endpoint for its tightening cycle. Instead, it is likely to assess conditions at each policy meeting and respond flexibly to changes in prices, wages, currency markets and global economic risks.

For households and businesses in Japan, higher interest rates could gradually increase borrowing costs, including those associated with mortgages and corporate loans. At the same time, a more normal interest-rate environment could support savers and strengthen confidence that Japan has moved beyond its long period of deflation. The coming meeting will therefore be closely watched both inside Japan and internationally as the BOJ continues its cautious transition toward conventional monetary policy.