BOJ Raises Its Policy Rate to 1.25%: What the Decision Means for the Yen

The Bank of Japan raised its policy-rate target on September 18, but the yen did not deliver the simple response a textbook might suggest.

The BOJ Policy Board voted 7–2 to encourage the uncollateralized overnight call rate to remain at around 1.25%. The new guideline takes effect on September 24. The Bank also set the rate on its complementary deposit facility at 1.25% and the basic loan rate at 1.5%.

Market reporting described the yen weakening after the announcement. That may seem backward: higher interest rates are often associated with a stronger currency. The apparent contradiction illustrates one of the most important rules in market analysis—prices react to new information relative to expectations, not to headlines in isolation.

Information check: The policy decision and inflation figures in this article were reviewed on September 18, 2026. Currency prices move continuously. This is an educational explanation, not a forecast or recommendation to trade the yen.

What the BOJ actually decided

The official statement contains four points that matter:

1. The target for the uncollateralized overnight call rate increased to around 1.25%.
2. The vote was 7–2, rather than unanimous.
3. The new operating guideline and related rates become effective on September 24.
4. The BOJ said it expects to continue adjusting the degree of monetary accommodation in response to economic activity, prices, and financial conditions.

The statement did not promise a fixed timetable for the next move. It said the timing and pace would depend on whether the Bank's economic outlook is being realized and on risks including oil prices, global AI-related demand, and foreign-exchange developments.

That conditional language matters because currency markets are forward-looking. A current rate increase may be less important than what traders infer about the next six or twelve months.

Why did the BOJ raise rates with inflation below 2%?

Japan's Statistics Bureau released August inflation data on the same day as the policy decision:

• Headline CPI increased 1.9% from a year earlier.
• CPI excluding fresh food increased 1.7%.
• CPI excluding fresh food and energy increased 1.9%.

Those readings were below the BOJ's 2% price-stability target. The Bank nevertheless emphasized underlying inflation, wage-to-price transmission, higher import costs, and rising medium- to long-term inflation expectations.

In its policy statement, the BOJ said CPI excluding fresh food had recently been in a 1.5%–2.0% range, while underlying inflation was approaching 2%. It also warned of a risk that underlying inflation could move above the target as firms became more willing to raise wages and prices.

This explains the disagreement inside the board. One dissenter argued that inflation excluding fresh food was recently below 2% and that economic conditions were not necessarily strong. The other said economic and price developments had not accelerated enough to justify a hike at this meeting.

Why can the yen fall after a rate increase?

Several mechanisms can produce that reaction.

1. The decision may already have been priced in

If market participants largely expected a 1.25% target, they may have bought yen before the announcement. Once the expected event occurs, some positions can be closed. The news is hawkish in isolation but not more hawkish than the market had anticipated.

2. The future path can matter more than today's rate

A currency reflects expected returns over time. Traders compare Japan's prospective rates with rates in the United States and other economies—not just today's BOJ level. If the statement implies gradual or uncertain future tightening, the expected interest-rate gap may remain wide.

3. The vote can change expectations

Two members opposed the hike. Their dissents do not reverse the decision, but they show that support for further tightening is not automatic. Markets may interpret that split as a reason to reduce expectations for a rapid sequence of increases.

4. Nominal and real rates are different

A nominal policy rate of 1.25% does not describe the full stance of policy. What matters for borrowers and savers is also the rate relative to inflation. The BOJ said real rates remained low, particularly at short and medium maturities, and described financial conditions as accommodative even after the change.