Bank of Japan Lifts Its Policy Rate to a 31-Year High, and the Yen Keeps Falling

The Bank of Japan lifted its policy rate by 25 basis points to 1.25 per cent, a 31-year high¹. The decision carried a 7 to 2 split vote². The move had been widely expected, and the governor signalled that the central bank has entered a new phase³. One account dated the increase to 18 September⁶.

Markets read the guidance as softer than the headline. Two dissenting votes and a lack of explicit hawkish direction disappointed traders, according to one market report⁴. A separate account described the tightening as the fastest pace of rate increases since 1990, and tied it to pressure from US Treasury Secretary Scott Bessent⁹. Wealth managers are divided on where the tightening cycle ends: the decision split Julius Baer and Nomura’s international wealth management arm on the terminal rate, while major bank equities gained favour¹.

Why it matters to investors

Higher Japanese rates have not rescued the currency. The yen traded at 157.58 per US dollar, with traders wary of the threat of intervention after markets judged the rate decision⁵. One analysis argued that even repeated increases may not reverse the broader trend of yen weakness, with 170 per dollar still in sight⁷.

The 25 basis point move has also tempered expectations for further tightening and weighed on the yen in cross rates². That combination – a tightening central bank and a still-falling currency – is the core of the carry-trade question facing global funds.

What to watch

The Japanese government bond market is the pressure point. Nomura has said Japan’s fiscal gamble has the JGB market flashing warning signs, arguing that rising borrowing costs could threaten the strategy while largely cost-driven inflation complicates the picture⁸. That is a different risk from the policy rate itself: it is about whether the fiscal side can absorb higher yields.

Watch intervention risk, given how closely traders are now tracking it⁵. Watch the terminal-rate debate, which remains unsettled among large wealth managers¹. And watch the external pressure channel, since the last increase has already been linked publicly to the US Treasury⁹. For investors, the practical question is whether Japanese yields rise far enough to pull capital home, or whether the currency keeps sliding despite them⁷.