The Bank of Japan raised its target for the short-term policy rate to 1.25% from 1.0% at its monetary policy meeting, Yomiuri Shimbun reported on September 18.

The new rate is the highest in Japan since 1995 and takes effect on September 24. It also marks the shortest gap between increases since the central bank ended its negative interest rate policy and other large-scale easing measures in March 2024. Until now the bank had moved roughly once every six months, weighing economic, price and financial conditions before each step. The last increase came at the June meeting.

The board cited the risk that inflation would run hotter than expected because of rising crude oil prices and a weaker yen, and judged that a policy response was warranted.

Seven of the nine policy board members, comprising the governor, two deputy governors and six members, voted in favour. Board members Toichiro Asada and Ayano Sato opposed the decision. Governor Kazuo Ueda was due to explain the decision at a news conference on the afternoon of September 18, with investors watching for any indication of the pace of future increases.

Ahead of the meeting, concern had been building inside the central bank that underlying inflation, which strips out temporary factors and is the measure the bank relies on most in setting policy, would rise above its 2% price stability target.

The corporate goods price index, which tracks transaction prices between companies at the upstream end of supply chains, rose 7.6% year on year in August. It was the third consecutive month above 7% since June. The central bank expects companies to pass more of those costs through to consumers from the second half of the current fiscal year, accelerating consumer price growth downstream.

Most officials regard current financial conditions as accommodative, and some inside the bank had argued for a faster pace of tightening to avoid falling behind the curve on inflation.

At an August 30 meeting with Ueda, US Treasury Secretary Scott Bessent said he strongly supported Japan taking decisive market and monetary policy measures to correct excessive yen weakness.