The Bank of Japan (BOJ) increased its interest rate by 25 basis points to 1.25%, marking its highest level since 1995. This decision, made on Friday, September 18, 2026, was largely anticipated by economists. However, despite the rate hike, the Japanese yen weakened against the dollar, falling by as much as 0.7% to 157.09 per greenback. This counterintuitive market reaction also saw the Nikkei 225 index gain 1.5% and the 10-year Japanese government bond yield slip.
The unexpected market response is attributed to several factors. Primarily, the BOJ's decision was not unanimous, with a 7-2 vote and two board members, Toichiro Asada and Ayano Sato, dissenting. Analysts believe these dissenting votes indicated that the BOJ might not adopt a significantly hawkish stance in the future. Asada pointed to core inflation being below 2% (specifically 1.7% in August) as a reason to hold rates steady, while Sato noted no substantial acceleration in economic and price developments. Additionally, the absence of an updated economic outlook report limited the BOJ's ability to reinforce a hawkish message, further dampening expectations for aggressive tightening.
Experts suggest that another rate hike is likely by December, with some, like Sam Jochim of EFG International, predicting a terminal rate between 1.75% and 2% in 2027. However, the BOJ has not provided a specific terminal rate, stating it will adjust monetary policy "as appropriate" to achieve its 2% inflation target. The market's interpretation of the BOJ's cautious tone and the split decision led to the yen's depreciation, as hopes for aggressive tightening were dashed. This scenario occurred even as U.S. Treasury Secretary Scott Bessent had reportedly stressed the need for higher BOJ rates in a meeting with Japanese Finance Minister Satsuki Katayama in May.
