Japan raises policy rate to 1.25% as August core inflation stays under 2% target

Data released on Friday showed Japan’s core consumer price index, which leaves out volatile fresh food but counts fuel, climbed 1.7% year-on-year in August, a touch below the median forecast of 1.8% and following a 1.8% increase in July. The figure marks the eighth month that core inflation has remained under the Bank of Japan’s 2% target, a situation supported by government subsidies that have softened utility-bill spikes.

At the conclusion of a two-day policy meeting, the BOJ voted 7-2 to raise its policy rate to 1.25% from 1%, indicating a willingness to keep tightening if needed. Officials warned that rising fuel costs linked to the Middle East conflict and higher import prices from a depreciating yen could push inflation above the target. The decision mirrors recent hikes by European and U.S. central banks, reflecting shared concerns over energy price shocks, expansive fiscal measures and growing demand for AI investment. By moving rates closer to a neutral level, the BOJ is further distancing Japan from its long-standing ultra-low-rate environment that once made the yen a cheap funding source.