- The move marked a quickening in the BOJ's rate hike cycle since March 2024.
- The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting from the hike.
- The BOJ said the move was because of a risk that inflation will deviate upward to beyond its 2% target.
The Bank of Japan has raised its policy rate by 25 basis points to 1.25%, the highest level since 1995.
The move also marked a quickening in the BOJ's rate hike cycle since it started monetary policy normalization in March 2024, with the rise taking place three months from the BOJ's last hike, as compared to six months previously.
The decision was split 7-2, with board membersToichiro Asada and Ayano Sato dissenting from the hike. The duo are seen as reflationists and were appointed by Prime Minister Sanae Takaichi earlier this year.
The rise in rate hikes was widely expected, with almost 90% of economists surveyed by CNBC expecting the 25-basis-point tightening. Those surveyed also correctly predicted the dissenters to the decision.
In its statement, the BOJ said the move was because of arisk that inflation will deviate upward to beyond its 2% target.
The central bank added that it aims to stabilize underlying inflation at "around 2%" so that price rises do not overshoot its target and adversely affect the Japanese economy afterward.
The hike comes amid rising inflation in the country and a historically weak yen, with the latest inflation headline rate for August at 1.9% and Tokyo and Washington conducting a coordinated intervention to prop up the yen.
The currency traded at 156.64 after the decision, weakening 0.45%, while the benchmark 10-year Japanese government bond yield fell 4.9 basis points to 2.947%.
Dissenter Asada noted that as the core inflation rate was below 2%, he was of the view that the economic situation may not be strong, and instead advocated for a hold. Core inflation for August stood at 1.7%, down from 1.8% in July.
Sato also said current economic and price developments did not appear to have substantially accelerated compared to before.
The U.S. has been vocal about Japan continuing its rate-hiking cycle, pressuring Takaichi's preference for an easy monetary policy and an expansionary fiscal policy.
Most recently, Treasury Secretary Scott Bessent told BOJ Governor Kazuo Ueda to take "decisive market and monetary steps" at the G20 finance ministers and central bank governors meeting earlier this month.