$USDJPY #BOJHikesTo1.25%31YearHigh

BOJ Raises Rate to 1.25%: 31-Year High and Market Response

The Bank of Japan (BOJ) raised its policy rate by 25 basis points on Friday, September 18, 2026, from 1.00% to 1.25%. This marks the highest level since April 1995 and the second increase in three months. The decision was made with a 7-2 vote.

Rationale for the Decision

In its statement, the BOJ indicated that inflation risks deviating above its 2% target. High energy costs and a weak yen are pushing up import prices, increasing inflationary pressure. The Board adopted a three-month rate hike, indicating a "timely" normalization process; this is double the pace of the previous six-month period.

Market Reaction

Prior to the decision, the market had almost fully priced in the rate hike. USD/JPY is trading at 157.083 after the decision; Intraday range: 155,873–157,144. The chart shows a recovery from the 152,094 low and a pullback from the 163,986 high; MACD is in positive territory but below the DIF and DEA signal lines.

Economic Background

The BOJ revised its GDP growth forecast for fiscal year 2026 to 0.6% and its core CPI forecast to 2.5%. While growth is moderate, inflation remains above target; this supports the BOJ taking steps towards tightening.

Carry Trade Risk

The BOJ's rapid normalization is putting pressure on yen-funded carry trade positions. As the US-Japan interest rate spread narrows, the appreciation of the yen increases the cost of these positions. Analysts note that carry trade is beginning to unwind even before a BOJ hike, which could tighten global liquidity conditions.

Developments to Watch

BOJ Governor Ueda's messages at the press conference are critical. A hawkish tone could help the yen hold onto its September gains; otherwise, it could give back its gains. Upcoming inflation and wage data will determine whether the BOJ will implement another rate hike by the end of 2026.

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