BOJ Hikes to 1.25%, Highest Since 1995

Highlights

The BOJ raised its policy rate 25 basis points to 1.25%, the highest level since 1995
The board voted 7-2, with two reflationist dissenters appointed earlier this year by PM Sanae Takaichi
The Nikkei 225's intraday gain widened to 2%, adding roughly ¥23.6 trillion ($150 billion) in equity value
The yen still weakened past 157 per dollar even as rates rose, while South Korea's KOSPI jumped 2.76% to break 6,900

The Bank of Japan raised its benchmark interest rate by 25 basis points to 1.25% on Friday, the highest level in 31 years, pressing ahead with the most aggressive tightening cycle Japan has run since the mid-1990s. The board split 7-2, with reflationist members Toichiro Asada and Ayano Sato dissenting. Both were appointed earlier this year by Prime Minister Sanae Takaichi, whose government has generally favored looser policy to support growth.

The increase, flagged well in advance and widely priced into global markets, marks the BOJ's first move since June and comes just three months after its previous hike. In its accompanying statement, the central bank said inflation expectations have risen moderately and that it needs to keep adjusting the degree of monetary support, adding it would continue raising rates in line with economic activity, prices and financial conditions. The bank has spent much of the past two years unwinding decades of near-zero rates as inflation has stayed stubbornly above its 2% target, even as Friday's data showed the pressure easing at the margin: core consumer prices rose 1.7% year-over-year in August, a touch below the 1.8% economists had expected.

Equity markets treated the hike as a green light rather than a headwind. The Nikkei 225's daily gain widened to 2% as the decision landed, touching 65,416.23 and adding an estimated ¥23.6 trillion, or roughly $150 billion, to the value of Japanese stocks in a single session. CNBC reported the move as confirmation that the BOJ is committed to normalizing policy after decades of near-zero rates aimed at fighting deflation. The rally wasn't confined to Tokyo: South Korea's KOSPI broke through 6,900 for the first time, climbing 2.76% intraday as regional sentiment improved alongside Japan's. The move contrasts with a separate Nikkei selloff earlier this year, when an unrelated AI-spending slowdown scare wiped roughly $150 billion off Japanese equities in a single session — a reminder that Tokyo's market has swung on both sides of major macro catalysts in 2026. It's also a sharp contrast with the Fed's own most recent move: the Federal Reserve's own 25-basis-point hike to 3.75%-4% landed with considerably more market anxiety attached than Friday's BOJ decision did.

A hike that didn't stop the yen from sliding

What didn't move the way textbook logic might suggest was the currency. Despite the rate increase narrowing Japan's yield gap with the United States, the yen weakened rather than strengthened, with USD/JPY pushing above 157 for the first time since September 3, up 0.68% on the day. Even after Friday's hike, US rates sit at 3.75%-4%, leaving a gap of more than 2.5 percentage points that has underpinned the yen carry trade for years — traders borrowing cheaply in yen to fund purchases of higher-yielding dollar assets. That spread narrowing by only a quarter point at a time has done little to unwind the trade so far, and Friday's price action suggests markets are treating the BOJ's pace as too gradual to change the calculus.

The broader signal from Tokyo is one of a central bank trying to thread a needle: tightening enough to keep inflation anchored near target without derailing the equity rally that has powered Japanese markets through 2026, or triggering the kind of carry-trade unwind that has periodically rattled global risk assets whenever the BOJ has moved unexpectedly aggressively. With two board members now on record pushing back against further hikes, and inflation readings coming in just under consensus, the BOJ has given itself room to slow the pace without abandoning the tightening path altogether — a balance investors in both Tokyo and Seoul appeared comfortable with on Friday, even as the yen kept sliding in the opposite direction.

For crypto and broader risk markets, a hike that lands without a yen shock is the best-case outcome: it removes one source of macro uncertainty heading into the next FOMC-adjacent trading week without reviving the kind of abrupt carry-trade unwind that has hit equities and digital assets alike in prior BOJ cycles.