Japan Hiked to 1.25% the Same Morning Core Inflation Fell to 1.7%, and the Yen Still Fell
- On September 18, 2026, the Bank of Japan raised its policy rate to about 1.25% from 1.0%, effective September 24. That's the highest since 1995.
- The vote was 7-2. Toichiro Asada and Ayano Sato dissented. Asada noted that core CPI has recently been below 2%.
- August national CPI, released the same morning: headline 1.9%, core (ex fresh food) 1.7%, down from 1.8%, and core-core (ex fresh food and energy) 1.9%.
- Electricity prices fell 8.9% month over month as government energy relief reset charges, pulling core CPI down.
- USD/JPY moved back above 157 after the decision as Governor Ueda declined to signal further hikes.
A hike on a soft inflation print
On Friday, the Bank of Japan raised its policy rate by a quarter point to about 1.25%. That's the highest since 1995. Hours earlier, the national CPI for August came out with core inflation at 1.7%, down from 1.8% and below the Bank's 2% target.
Two board members said so directly. Toichiro Asada argued that with core CPI "below 2 percent recently, it could not necessarily be said that the economic situation was strong." Ayano Sato said economic and price developments "did not appear to have substantially accelerated." The final vote was 7-2.
The majority's case was that underlying inflation is approaching 2%, and that with rates still low, financial conditions are too loose.
Why the core number is misleading
The August drop in core CPI came almost entirely from one item. Government energy relief reset electricity charges, and electricity prices fell 8.9% in a month. Energy overall fell 5.0% month over month.
Strip energy and fresh food out and the picture changes:
| Measure (August 2026, y/y) | Rate |
|---|---|
| Headline CPI | 1.9% |
| Core CPI (ex fresh food) | 1.7% |
| Core-core CPI (ex fresh food and energy) | 1.9%, and +0.4% month over month |
A 0.4% monthly rise in core-core prices is strong for Japan. The BoJ looked past the subsidy-driven dip. The dissenters didn't.
The yen fell instead of rising
Normally, a rate hike strengthens a currency. This time USD/JPY moved back above 157 after the decision. The yen weakened.
Three reasons:
- It was priced in. Markets expected the hike.
- Ueda didn't promise more. "There could be various possibilities. We shouldn't rule anything out," he said. He also stressed not moving so fast that it shocks asset prices.
- The gap is still huge. Japan is at 1.25%. The Fed moved to 3.75%-4.00% two days earlier. Holding dollars still pays about 2.5 to 2.75 points more.
The Japanese stock market liked the combination. The Nikkei rose more than 1% after the decision.
Why global investors should care
The carry trade. For years, investors borrowed cheaply in yen and invested elsewhere. Every BoJ hike raises the cost of that trade. In August 2024, a fast yen rally triggered a sharp, brief global sell-off as those trades unwound. A slow, well-telegraphed hiking path lowers that risk. A surprise could bring it back.
Japanese money coming home. Japanese institutions are among the world's biggest holders of US Treasuries and foreign bonds. As Japanese yields rise, the pull to invest at home grows. That's one of the slower-moving forces behind higher global long-term yields.
For Canadian and US investors in Japan: a weak yen has cut into returns on unhedged Japanese ETFs for years. If the BoJ keeps hiking and the Fed stops, the yen could strengthen, which would help unhedged holders. That's a slow shift, not a switch that flips at once.
The honest uncertainty
The BoJ now has two dissents and a governor who won't pre-commit. The next hike depends on wage talks, the energy subsidies, and whether the yen stays weak enough to worry Tokyo. The one thing that's clear is direction: Japan is normalizing rates, slowly, after three decades near zero.
Frequently asked questions
What did the Bank of Japan decide in September 2026?
On September 18, 2026, the BoJ raised its short-term policy rate to around 1.25% from 1.0%, effective September 24. That's the highest level since 1995. The vote was 7-2, with Toichiro Asada and Ayano Sato preferring to hold.
Why did the BoJ hike when inflation is below 2%?
The Bank said underlying inflation is approaching 2% and financial conditions remain accommodative, so it's reducing stimulus gradually. The low core reading in August was partly caused by government energy relief that cut electricity prices 8.9% in a month. Excluding energy and fresh food, prices rose 1.9%.
Why did the yen fall after a rate hike?
The hike was widely expected, so it was already priced in. Governor Ueda gave no hawkish signal and no promise of more increases, and two members dissented in favour of holding. Markets read that as a slower path than hoped. With US rates at 3.75%-4.00%, the gap still strongly favours the dollar.
How does a BoJ rate hike affect global markets?
Japanese investors are among the largest holders of foreign bonds, and cheap yen borrowing has funded trades around the world. Higher Japanese rates can gradually pull money home and make those carry trades less attractive. Sharp moves in the yen have triggered global volatility before, as in August 2024.
Primary sources
Data & disclaimer: This article is for educational purposes only and is not financial or investment advice. Figures reflect data available as of Sep 18, 2026, and conditions change — always confirm current pricing, rates and rules with the provider before you act. Written by Elizabeta Dimoska. See our editorial standards and disclosure.
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