The Bank of Japan accelerated its rate hikes to the highest level since 1990 following calls from Washington

On September 18, the Bank of Japan (BOJ) raised its key interest rate by 0.25 percentage points to 1.25%, accelerating the tightening of monetary policy to its fastest pace in 36 years, according to Bloomberg. The new rate is now at the lower end of the range that the BOJ itself considers neutral—that is, neither stimulating nor restraining the economy.

It has been only three months since the last rate hike—the “shortest interval between rate hikes since 1990,” notes Bloomberg. At that time, the central bank’s rapid tightening of monetary policy played a key role in the bursting of Japan’s financial bubble.

The regulator is now stepping up its pace in the face of rising inflation risks and, as Bloomberg put it, unusually direct calls from Washington to continue normalizing monetary policy. The latest decision followed pressure from U.S. Treasury Secretary Scott Bessent, who had been urging Japan to raise interest rates, the agency notes.

The Bank of Japan's decision to raise interest rates was approved by a vote of seven to two; Toichiro Asada and Ayano Sato did not support it. Both were nominated by Japan’s new Prime Minister Sanae Takaichi and are considered less inclined to raise the rate, according to Bloomberg.

Currency market participants appear to have focused specifically on those two dissenters, Bloomberg analysts noted. Following the vote, algorithmic trading funds were buying dollars with yen, traders told them.

Immediately following the decision, the yen weakened to 156.95 per dollar. According to Bloomberg, the regulator’s statement contained no clear signs of hawkish rhetoric that would have spurred a rally in the yen. Nevertheless, the Japanese currency remains stronger than its July levels: coordinated intervention by the U.S. and Japan at the end of that month helped it pull back even further from the nearly 40-year low (163.99 yen per dollar) it had hit in July.

The Japanese regulator stepped up its pace at the same time that other major central banks were reversing their monetary policy in the wake of the war with Iran, according to Bloomberg. On September 16, the U.S. Federal Reserve raised interest rates for the first time in three years and signaled another hike by January, while the European Central Bank had raised rates for the second time this year a week earlier.

The Bank of Japan, the Federal Reserve, and the European Central Bank raised borrowing costs in the same month for the first time. The synchronized nature of these decisions indicates that the Bank of Japan has moved away from its long-standing role as an outlier among the world’s major central banks, Bloomberg notes. Following its historic abandonment of negative interest rate policy in March 2024, it has raised rates five more times, including this latest decision, Nikkei reports.

This article was AI-translated and verified by a human editor