BOJ lifts rates to 31-year high, flags shift in policy focus

The Bank of Japan raised interest rates to a 31-year high on Friday and signalled its readiness to keep pushing up borrowing costs, joining other major central banks in fighting persistent inflation pressures driven by soaring oil costs. The BOJ raised its policy rate to **1.25% from 1%** by a **7-2 vote**. Dovish board members **Toichiro Asada** and **Ayano Sato** dissented to the decision. The move follows rate hikes by its European and US peers, highlighting central banks' focus on global inflation risks caused by the Iran war-induced energy cost spike, expansionary fiscal policies and surging demand for AI investment. The BOJ exited a decade-long stimulus in 2024 and has raised rates several times, including in June, at a pace of roughly twice a year on the view Japan was making progress in durably achieving its 2% inflation target. Friday's hike to **1.25%** brings the rate within the BOJ's estimated **1.1% to 2.5%** range of Japan's nominal neutral rate, or the level that neither cools nor overheats growth, raising questions about how far it could eventually hike rates. But the BOJ still lags global peers with its policy rate lower than that of the European Central Bank, which raised its key rate last week to **2.5%**, and the Fed's **3.75%-4.00%** range. Analysts polled by Reuters expect the BOJ to hike rates to **1.5% by end-March next year** and then to **1.75% in the second quarter of 2027**. Most saw the terminal rate as being at least **1.75%**. BOJ Governor **Kazuo Ueda** said with underlying inflation approaching 2%, the bank's policy focus had shifted. "If risks of underlying inflation overshooting 2% materialise, that could have a negative impact on Japan's economy," he told a news conference. "It's important to stabilise underlying inflation at 2%. Our policy phase has changed." In a statement announcing the decision, the BOJ said while economic and price developments are moving in line with its baseline forecast, there was a risk of underlying inflation deviating from its 2% target. "Wholesale inflation remains elevated and price pressures from business-to-business trading has started to spill over into consumer prices," the BOJ said. "Underlying inflation has been approaching 2%" as companies continue to pass on the cost of higher wages and inflation expectations keep heightening, it said. The widely expected move failed to immediately prop up the yen, which initially fell as investors focused on a lack of explicitly hawkish guidance and two dovish dissenters who argued for patience in pushing up borrowing costs. The yen **JPY=** sank to **156.91 per dollar** after the announcement, as the usual 25-basis-point hike and the dovish dissenters tempered expectations of bolder tightening. "The tone of the statement, along with two dissenters on the decision to raise rates, leaves lingering doubts that Japan's central bank will be cautious in tightening monetary policy further," said **Fred Neumann**, chief Asia economist at HSBC in Hong Kong.

BOJ lifts rates to 31-year high, flags shift in policy focus

BOJ raises rates and signals further tightening

BOJ still lags global peers as markets price more hikes

Ueda says policy focus has shifted as inflation approaches 2%

Yen weakens after dovish dissents and limited hawkish guidance

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