Bank of Japan Lifts Its Policy Rate to a 31-Year High of 1.25%

The Bank of Japan raised its benchmark interest rate by a quarter point to 1.25% on Friday, the highest level since 1995. The central bank pointed to domestic inflation driven in part by elevated energy costs and a currency that has stayed historically weak.

The vote was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting. The two dissents were read as a signal that the path to further tightening is less certain than the headline decision implies, and the yen weakened rather than strengthened on the news, trading around 156.64 against the dollar. The 10-year Japanese government bond yield fell 4.9 basis points to 2.947%.

The decision continues Japan's move away from decades of ultra-low rates and arrives in the same week as the Federal Reserve's own hike. For U.S. investors, the relevance is the funding channel: a rising Japanese policy rate narrows the gap that has underpinned carry trades and can ripple into global bond markets and risk appetite.