Bank of Japan raises rates to 1.25%, the highest in 31 years, on a split 7-2 vote

The Bank of Japan raised its policy rate by 25 basis points to 1.25%, up from 1.00%, taking Japanese borrowing costs to their highest level since 1995. The board split 7-2 on the decision, with two members dissenting, and the move itself was described in coverage as "widely expected".

The framing matters more than the headline number. This is not the first hike in three decades: it is the sixth step of a tightening cycle that began in March 2024 when the BOJ exited negative rates, and it follows the June 2026 move to 1.00%. The 31-year figure describes the resulting rate level, not the frequency of policy changes. Nor is it a response to runaway prices. Core CPI rose 1.7% year on year in August, short of a 1.8% forecast and a seventh consecutive month below the central bank's 2% target, with core-core inflation at 1.9%. Officials presented the hike as insurance against inflation deviating upward from target rather than as a brake on inflation already above it.

The split vote is the part the market had not fully priced. A 7-2 board, combined with the absence of forceful guidance on what comes next, leaves the pace of further tightening genuinely open, and coverage of the currency reaction diverged sharply on the day, so the yen's net move is better checked against a live quote than inferred from headlines.

For investors with Japan exposure through vehicles such as EWJ, the read-through runs through two channels that pull in opposite directions. A wider rate differential narrowing against the dollar supports the yen, which compresses translated earnings for Japan's export-heavy manufacturers while lowering imported input costs for domestic-facing firms. What to watch next is the next core CPI print against the 2% target and whether BOJ communication starts pointing at a specific follow-up meeting.