BOJ Set for 25-Basis-Point Rate Hike as Yen Weakness Fuels Inflation

The Bank of Japan is widely expected to raise interest rates by 25 basis points on September 18, as policymakers confront persistent inflation and prolonged weakness in the Japanese yen.

The anticipated BOJ rate hike would lift the benchmark interest rate to 1.25%, its highest level since 1993. It would mark the central bank’s sixth increase since abandoning its ultra-loose monetary policy in 2024 and its second rate hike of 2026.

Expectations for tighter monetary policy have strengthened as Japanese inflation remains elevated. Higher oil and gas prices linked to the Iran conflict have added to price pressures, although government fuel subsidies have limited the impact on consumer inflation. Japan’s producer price inflation nevertheless accelerated to a three-and-a-half-year high in August, raising concerns that higher business costs could eventually feed into consumer prices.

Resilient wage growth may also give companies greater scope to pass rising costs on to households, keeping inflation risks on the BOJ’s radar.

Pressure to tighten policy has also increased following unprecedented joint currency-market intervention by Japan and the United States to support the yen. U.S. Treasury Secretary Scott Bessent subsequently indicated that he expected the BOJ to raise rates more quickly to help stabilize the currency.

BOJ Governor Kazuo Ueda has said policymakers will discuss rate increases at the September meeting. With a 25-basis-point hike largely priced in, markets will focus closely on Ueda’s post-meeting comments for signals about the pace of future monetary policy normalization.

A hawkish BOJ outlook could strengthen the yen and push USD/JPY lower. The pair was recently trading around 155.73, while persistent yen weakness remains a contributor to imported inflation.

Japanese equities could face pressure from higher borrowing costs and tighter liquidity. Technology stocks may be particularly sensitive to rising rates after helping drive the Nikkei 225 higher this year. The benchmark index has gained about 24% in 2026, although it remains below its June record highs.

Rising Japanese government bond yields and concerns about fiscal policy under Prime Minister Sanae Takaichi add further complexity as the BOJ weighs inflation risks against economic growth.