TOKYO — For the first time in a generation, Japanese mortgage holders woke Thursday to a world where borrowing money carries a meaningful cost. The Bank of Japan lifted its benchmark rate to 1.25 percent, its highest level since 1995, ending the latest phase of the cheapest era in Japanese financial history. For families who locked in housing loans at rates of 0.4 or 0.5 percent, the move signals a rate trajectory that, in the span of roughly eighteen months, has moved faster than at any point since Japan’s bubble economy began deflating in the early 1990s.
The decision, approved 7-2 at Thursday’s policy meeting and effective September 24, Euronews reported, was the third rate increase since the BOJ abandoned negative interest rates in March 2024, a policy held in various forms since the late 1990s and deepened to negative territory in 2016. The pace is accelerating. Three months separated September’s move from July’s, compared to roughly six months between the two prior steps. Governor Kazuo Ueda told reporters after the meeting that underlying inflation was “quite close to 2 percent” and that the board could not rule out a 50-basis-point increment at a future meeting. He added that the BOJ would remain “mindful of upside price risks,” language that pointed the rate path further upward than the market had priced.
But the headline figure and the governor’s hawkish framing understated the tensions the decision exposed. Two of the nine-member board, Toichiro Asada and Ayano Sato, both appointed by Prime Minister Sanae Takaichi, dissented, a split that rattled currency markets more than the hike itself.
“Two dissenting votes came as a surprise,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation. The yen slid past 157 per dollar within hours, a result that seemed to contradict the logic of tightening. Faster rate hikes should attract capital and strengthen a currency. That the yen weakened suggests the market read the dissent as a signal that the BOJ’s resolve may be softer than its action implied, and that the current majority of seven could narrow further, moderating the pace of future hikes sooner than the board’s stated outlook suggested.
The two dissenters have argued that wage growth in Japan, while recovering, remains insufficiently broad-based to justify the pace of normalization. Whether they represent a genuine policy faction capable of stalling future hikes, or simply outliers in a board with a clear majority direction, is precisely the question Thursday’s decision left unanswered. The market appears to have priced the latter, tentatively: that the dissenters slow but do not stop the rate path.
What is harder to contain within the framework of domestic monetary policy is how openly political Thursday’s hike became before the vote. US Treasury Secretary Scott Bessent said publicly this week that he hoped Ueda would “do the right thing,” a phrase that crossed from diplomatic encouragement into something more pointed.
Bessent, who in August oversaw the first US purchase of yen in 15 years, spending an estimated $5 billion to $10 billion to stabilize the currency, recasts Thursday’s decision as an episode in a running negotiation between Washington and Tokyo over whose central bank preferences take precedence. A weaker yen exports Japanese inflation to American consumers while lifting the yen-denominated earnings of Japan’s export sector. A stronger yen reverses those flows. Bessent’s public nudge was, at its core, a demand that Tokyo allow rates to rise faster than its own inflation data might strictly require, to prevent the yen from sliding further and widening the already uncomfortable bilateral trade gap.
The Nikkei 225 rose 1.5 percent on Thursday, Al Jazeera reported, a reaction that reflects the ambiguity. Japan’s equity market benefits from yen weakness, as overseas earnings inflate when translated back into a softer domestic currency, and equity investors may be pricing the dissenters as insurance against the most aggressive normalization scenarios.
Of 52 economists surveyed before the decision, 93 percent expected at least one additional BOJ hike before the end of January. Roughly a third anticipated action in December, a timeline that requires Ueda to hold a board majority that on Thursday showed visible fractures. The BOJ first telegraphed a faster normalization pace in July, when the yen was approaching a 40-year low and the political pressure to act was intensifying. Whether that pace holds if the yen resumes its slide, erasing the BOJ’s stated rationale while simultaneously boosting equity gains, is the central question Thursday’s vote left open.
What the Bank of Japan did not clarify, and what Ueda’s measured language at the press conference did not resolve, is where the BOJ’s rate trajectory is actually being determined. Thursday’s 7-2 split suggests the answer is contested even inside the institution meant to set it.
