BOJ raises its policy rate to 1.25%, a 31-year high, and the yen still falls

The Bank of Japan raised its policy rate on Friday to around 1.25%, the highest since 1995. Two days earlier, on Wednesday, September 16, the Federal Open Market Committee had lifted its federal-funds target range by 25 basis points to 3.75% to 4.00%, the first U.S. increase since 2023. Japan's new guideline still sits 2.50 to 2.75 percentage points below the dollar, and the yen weakened 0.5% to 156.75 per dollar after the statement.

The Policy Board, ending a two-day meeting in Tokyo, voted 7-2 to encourage the uncollateralized overnight call rate, Japan's policy rate, to remain at around 1.25%, up 25 basis points from 1.0%. The complementary deposit rate paid on excess reserves will also be 1.25%, and the basic loan rate 1.5%, all from Thursday, September 24. Toichiro Asada dissented, arguing that consumer prices excluding fresh food had recently been below 2% and that the economy could not necessarily be called strong. Ayano Sato dissented on the grounds that economic and price developments had not substantially accelerated and that a hike was not appropriate now.

On Tuesday, June 16, the same board had raised the rate to 1.0% on a 7-1 vote, three months before Friday's step. On July 31, it voted 8-1 to hold, with Hajime Takata proposing the 1.25% step that carried on Friday. The center of the committee moved. It did not move as one.

The statement keeps the hiking bias and leaves bond buying alone

The Bank's forward guidance was unchanged in substance. "The Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions," the statement said. It also said accommodative financial conditions are expected to be maintained after this change, "continuing to firmly support economic activity."

Friday's document did not announce a change to Japanese government-bond purchases or to the size of the Bank's balance sheet. This meeting did not include a new Outlook report, the board's published growth and inflation forecasts.

That mix, a widely expected 25-basis-point step, a split vote, and no tightening of the bond-buying plan, is the policy the currency market had to price in the first hour.

Yen slips; the 10-year JGB yield falls

The U.S. dollar index was at 100.04 as of 1:50 a.m. Eastern Friday, so the yen's drop was not a broad dollar rally. Japan's 10-year government-bond yield fell 4.9 basis points to 2.947% after the decision, remaining just under 3%.

Tokyo equities were already in the Friday session when the statement landed. The Nikkei 225 was at 65,129, up 1.55%, as of 1:35 a.m. Eastern. Over three months the same index is down 8.6%.

U.S. markets last closed on Thursday, hours before the Bank of Japan spoke. The 10-year Treasury yield finished that session at 4.94%, the 2-year at 4.67%, and the 30-year at 5.29%, all on the Federal Reserve's day, not Tokyo's.

A 1.25% Japan still funds a wide carry

The remaining rate gap is why a 25-basis-point Japanese hike, fully expected, did not have to squeeze yen-funded positions. Cross-border yen borrowing, a proxy for the carry trade, stood at a record 360 trillion yen, or $2.35 trillion, as of March, on a Jefferies reading of Bank for International Settlements data.

The majority hiked into a split data picture. Japan's August consumer-price index rose 1.9% from a year earlier, matching July and sitting just under the Bank's 2% target. Real wages were up 2.4% in July, the seventh straight gain and the largest since May 2021, with nominal pay up 4.7%. Asada's dissent sat on the consumer-price print. The majority sat on the wage side, and on the July Outlook, which had put fiscal 2026 CPI excluding fresh food at a 2.5% median.

Unhedged Japan last closed before the statement

The funds that hold this market for U.S. investors have not had a session since the announcement. If the yen's post-statement slip holds into the New York open, unhedged holders take the currency move that yen-hedged funds are built to remove. Mitsubishi UFJ, Sumitomo Mitsui and Mizuho are 10.1% of an unhedged fund of Japanese stocks, AEWJ, which etf.net grades A in its Japan category.

Two dissents and the December question

Governor Kazuo Ueda's press conference is scheduled for around 3:30 p.m. Tokyo time, 2:30 a.m. Eastern Friday. He has not spoken since the vote.

Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo, called the yen's drop a knee-jerk reaction to the two no votes and said the Bank can keep markets pricing hikes roughly every three months without that necessarily meaning an October move. Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, said the dissents and the lack of a fresh Outlook report limited how hawkish a message the Bank could send; he expects a follow-up hike in December. Masato Koike, senior economist at Sompo Institute Plus in Tokyo, said Sato joining Asada should not delay the pace: her dissent was opposition to timing, not to rate increases as such.

The next decision, on October 29-30, comes with a new Outlook. The meeting after that is December 17-18.