Japan BOJ Raises Policy Rate by 25 bp to 1.25 . Further Tightening Ahead But No Clear Acceleration Signal

Economics Research 18 September 2026 | 12:36PM JST

Japan: BOJ: Raises Policy Rate by 25 bp to 1.25%. Further Tightening Ahead But No Clear Acceleration Signal

Key Points Tomohiro Ota | n The Bank of Japan (BOJ) held its Monetary Policy Meeting (MPM) on September Goldman Sachs Japan Co., Ltd.

17-18, and, as was widely expected, decided to raise its policy rate guidance on the overnight call rate (TONA) by 25 bp to 1.25% (by a 7-to-2 majority vote). n The BOJ stated that financial conditions remain accommodative even after the policy rate hike, suggesting room to continue raising the policy rate toward the neutral rate. Its forward guidance also suggested an intention of continuing to raise the policy rate. n The September statement retained the BOJ’s view, since the June MPM statement, of the risk of underlying inflation exceeding the price stability target of 2 percent. n At Governor Kazuo Ueda’s press conference starting at 15:30 JST, our focus will be, in particular, on the BOJ’s current assessment of whether it has fallen behind the curve, a factor that could influence the pace of rate hikes going forward. Other focus points are his views regarding upside risks to the underlying inflation rate, the level of the neutral rate, the possibility of an economic slowdown caused by rate hikes, and his assessment of Middle East- related risks.

n The BOJ held its MPM on September 17-18, and, as was widely expected, decided to raise its policy rate guidance on the overnight call rate (TONA) by 25 bp to 1.25% (by a 7-to-2 majority vote). Board members Toichiro Asada and Ayano Sato dissented, proposing to maintain the policy rate. n The overall assessment of the economy was unchanged from the July Outlook Report, i.e., it “...has recovered moderately, although some weakness has been seen in part...”. The assessments for each component were mostly unchanged from the July Outlook Report. n On inflation, the BOJ assessed the three upside risk factors to prices it specified in the July Outlook Report (the Middle East situation, AI-related demand, and yen weakness), as factors for which “attention continues to be warranted”. Its evaluation of the upside risk to underlying inflation was also unchanged from the July Outlook Report (and the June MPM statement), stating, there is “a risk of underlying CPI inflation deviating upward to a level above the price stability target of 2 percent.”

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n Today’s rate hike brings the policy rate within the BOJ’s neutral rate estimation band of 1.1-2.5%. However, the BOJ statement retained the phrase “Accommodative financial conditions are expected to be maintained after the change in the policy interest rate,” as it did after the June rate hike, implying there is still room for rate hikes to continue towards the neutral rate. Forward guidance on monetary policy also suggested an intention of continuing to raise the policy rate, as the BOJ kept the statement, “...the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation...”. n At the Governor’s press conference starting at 15:30 JST, questions are likely to focus on the pace of future rate hikes and the assessment of the current exchange rate. Our focus will be, in particular, on the BOJ’s current assessment of whether the BOJ has fallen behind the curve, which could influence the pace of future rate hikes. We assume Governor Ueda does not see the BOJ as currently being behind the curve. In addition, the Governor is likely to be asked once again for his views on the upside risks to the underlying inflation rate, the level of the neutral rate, the possibility of an economic slowdown caused by rate hikes, and the effect of the Middle East disruption on the economy and prices, that could impact the judgment on monetary policy. We do not expect the Governor’s views to change significantly from the July meeting.

Tomohiro Ota Yuriko Tanaka Goldman Sachs Japan Co., Ltd. Goldman Sachs Japan Co., Ltd.