The hawkish message failed to rally the yen. Instead, the currency weakened as investors seized on dissent from two policymakers who argued the BOJ should remain patient in raising borrowing costs.
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 remains well behind its peers, with rates below the European Central Bank's 2.5% and the Fed's 3.75%-4.00% range. With other major central banks tightening, markets are focused on whether the BOJ will need to raise rates faster to curb yen-driven inflation.
Ueda said it was hard to pre-judge where Japan's neutral or terminal rates sat.
"We're in a phase where we need to look at various data carefully," he said. "But that doesn't mean we can move slowly."
Analysts polled by Reuters expect the BOJ to hike rates to 1.5% by end-March next year and to 1.75% in the second quarter of 2027. Most saw the terminal rate as being at least 1.75%.
Markets had nearly fully priced in a September rate hike after a slew of hawkish BOJ signals, including its warning in July of the risk of an inflation overshoot.
US Treasury Secretary Scott Bessent also piled in, voicing his support for "decisive" monetary steps to combat yen weakness in a meeting with Ueda this month.
Prime Minister Takaichi, meanwhile, has moved to cement her influence over economic policy, reappointing reflationist ally Minoru Kiuchi as economy minister, a role that grants him access to BOJ meetings.
While the two Takaichi-appointed dovish dissenters remain a minority in the hawkish-leaning board, such political factors may affect the pace of future BOJ rate hikes, some analysts say.
TLT•
