Bank of Japan Hikes Rates to 1.25% Amid Concerns Over Inflation

The Bank of Japan raised its policy interest rate by 25 basis points to 1.25% on September 18, marking the highest level since 1995. The decision was made with a 7-2 vote in favor, indicating some internal debate behind the move.

The increase from 1.0% is significant, as it establishes 1.25% as a 31-year high for Japan's policy rate. This move comes despite core inflation being 1.7% in August, below the Bank of Japan's 2% target.

The bank's rationale centered on an assessment that underlying consumer-price inflation was approaching 2% and financial conditions remained accommodative. The decision also carries significance outside Japan, as it erodes one of the world's remaining sources of ultra-cheap funding.