(Sept 18): The Bank of Japan (BOJ) raised its benchmark interest rate in a split decision showing dissent within the board as it confronts mounting inflation risks and unusually explicit calls for further policy normalisation from Washington.

The BOJ lifted its policy rate by a quarter point to 1.25% on Friday at the end of a two-day meeting, according to its statement, in a move predicted by all economists surveyed by Bloomberg. 

The yen weakened after two board members, Toichiro Asada and Ayano Sato, voted against the hike, suggesting resistance to a ramped-up pace of rate increases that is the fastest in more than three decades.  

Japan’s currency slipped about 1% to 157.54 against the dollar during governor Kazuo Ueda’s post-decision briefing, even after he said the BOJ needs to avoid letting prices deviate above its target and harming the economy.

“The stage for setting policy has changed,” Ueda said.  When asked if back-to-back hikes or larger moves are possible, he said the BOJ wouldn’t rule out any particular policy options in advance of board meetings.

Both Asada and Sato were handpicked by Prime Minister Sanae Takaichi, who is known for her wary stance on rapid rate hikes that might slow the economy. They may increasingly try to serve as a brake on the board going forward.

The lack of more hawkish language in the statement also offered little reason for investors to make bullish bets on Japan’s currency, especially after the US Federal Reserve (Fed) firmed up its views following its rate increase with a unanimous vote earlier this week.

“The key point was that two board members voted against the decision. I believe that the market took that as dovish relative to what had been priced in,” said Kento Minami, a senior economist at Daiwa Securities. “On the other hand, the BOJ’s assessment of the economy, prices and financial conditions remains hawkish. You can see that they see the need of a faster pace of rate hikes than before.”

Japan’s exporter-heavy Nikkei 225 stock gauge rose 1.4% as the yen weakened. The broader Topix index edged lower, weighed down by financial stocks.

Markets outside Japan took the BOJ decision in stride. The two-year Treasury yield held a small rise after the decision, while most Group-of-10 currencies except for the yen traded in a narrow range. 

The rate hike, coming just three months after the BOJ’s previous increase, marks the shortest interval between rate hikes since 1990, when the central bank’s rapid policy tightening played a key role in bursting Japan’s asset bubble. It was the sixth rate increase under governor Kazuo Ueda — the most by any BOJ chief in at least half a century — and came after a wave of US pressure from Treasury Secretary Scott Bessent to push up rates.

The BOJ’s accelerated pace of hikes also comes after a shift in the global backdrop for monetary policy as authorities address the fallout from the Iran war. The Fed underscored the change with its Wednesday move and the European Central Bank (ECB) raised rates last week for the second time this year. 

The latest hike in Japan marks the first time that the BOJ, Fed and ECB have all raised borrowing costs in the same month. The synchronised moves also underscore how far the BOJ has come from its long-time status as a global monetary policy outlier.

The increase came as little surprise after a salvo of remarks from Bessent helped cement market expectations for a move, which was almost fully priced in by early September. In a meeting with Ueda last month, Bessent “expressed strong support” for Japan’s decisive steps to address the weakening of the yen, according to the Treasury Department.

While the yen weakened against the dollar shortly after Friday’s decision, it remains stronger than its levels in July after coordinated intervention by the US and Japan at the end of that month helped push it further from the roughly 40-year low of 163.99 set on July 23.

The focus now turns to whether Ueda will deliver a hawkish message on the outlook for further rate hikes at his press briefing starting at 3.30pm in Tokyo on Friday. Overnight swaps already point to an 80% chance of a follow-up hike in December. That suggests the governor needs to keep the door open to a hike before year end to avoid further disappointment in the currency market.

Overnight swaps already point to an 85% chance of a follow-up hike in December. That suggests the governor needs to keep the door open to a hike before year end to avoid further disappointment in the currency market.

The BOJ reiterated its stance that it would continue raising rates if its outlook for the economy and prices is realised. At 1.25%, the policy rate sits for the first time sit inside the lower end of the bank’s estimated range for the neutral rate, a level considered neither stimulative nor restrictive.

Japan’s key inflation gauge remained above 2% for a fourth straight year through 2025, and the BOJ expects inflation to stay above its target in coming years. Analysts expect price gains to accelerate toward 3% by early next year.

The central bank’s awareness of those those upside risks fed into its latest decision.

“As for underlying consumer price index inflation, there is a risk that it will deviate upward to a level above the price stability target of 2%, given factors such as firms’ behaviour shifting more towards raising wages and prices and medium- to long-term inflation expectations rising,” the BOJ said in its statement.

Still, data released earlier on Friday showed that core inflation slowed a tad in August thanks partly to distortions from subsidies. Both of Takaichi’s selections for the board suggested there was little need to raise rates at the latest meeting given the lack of acceleration in inflation and that may make it difficult to build consensus on the board for another hike this year. 

Given Bessent’s interest in propping up the yen after the July joint intervention and his flurry of recent remarks favouring rate hikes, he could serve as a factor in the equation for the rate path going forward.

“I think Bessent will naturally be satisfied with this rate hike,” said Itochu’s Takeda, who expects the next rate increase in January. “However, if expectations for additional hikes fade and the yen continues to weaken, I expect he will voice some criticism.”

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