Bank of Japan Follows Fed and ECB With Rate Hike to 1.25%

The Bank of Japan (BOJ) raised its interest rate to 1.25% on Friday, the highest level since 1995, as energy costs from the war in Iran pressure economies.

The board split 7-2 on the decision, with members Toichiro Asada and Ayano Sato dissenting. Markets had priced in the move almost entirely before the meeting ended.

Three Central Banks, One Energy Shock

The hike arrives in a busy week for rate decisions this year. On Wednesday, the Fed lifted its target range to 3.75%-4.00% in a unanimous vote, marking its first increase since 2023.

The ECB moved a week earlier, raising all three key rates by 25 basis points and taking its deposit rate to 2.50%.

Even after Friday’s increase, Japan still sits well below both peers. The move is the BOJ’s sixth increase of the current cycle. The policy rate was -0.1% when tightening began in March 2024.

The common driver is fuel. Japan imported 94% of its crude oil from the Middle East in 2025. Most of it passes through the Strait of Hormuz. 

The war in Iran has disrupted those shipments and lifted prices this year. Japan’s headline inflation stood at 1.9% in August, while core inflation eased to 1.7% from 1.8%.

“As for the future conduct of monetary policy, given that underlying CPI inflation has been approaching 2 percent and financial conditions have been accommodative, 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 read.

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The UK Sits This One Out

Britain went the other way. The Bank of England held its rate at 3.75%, a sixth straight hold, with three of nine policymakers pushing for 4%.

“So far, higher global energy costs have had a limited effect on price and wage setting in the U.K,” said Bank Governor Andrew Bailey.

BeInCrypto reported that UK inflation hit a five-month high of 3.1% in August. Still, the yen adds pressure Britain does not face. Tokyo and Washington intervened jointly in August after the currency sank to a 40-year low.

That was their first coordinated action since 2011. Reuters-polled economists expect interest rates to rise to 1.5% by the end of March 2027, then 1.75% in the second quarter.

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