The Bank of Japan is expected to raise its policy rate to 1.25% at its September meeting, but the focus will also be on how its estimate of the neutral interest rate and its interpretation of accommodative monetary policy affect the market. How the Bank of Japan explains the line between monetary normalization and accommodation will be a key focus going forward.
Financial markets expect the Bank of Japan to raise its policy rate to 1.25% at its monetary policy meeting on 17–18 September. The yen is moving toward the mid-¥150s per dollar in September, while long-term interest rates have remained in the 3% range.
The decision to raise rates at the meeting itself would not be new information, and the yen’s direction may depend on the Bank’s stance on further rate hikes. If the Bank of Japan signals that it will accelerate rate increases, this could drive the yen higher.
The main point of the September rate hike is not the hike itself, but how the Bank of Japan assesses the neutral interest rate after the policy rate reaches 1.25%. The estimate for the neutral rate is 1.1–2.5% in nominal terms as of March 2026, and if interest rates exceed the lower bound, the interpretation of monetary accommodation may change.
Going forward, the Bank of Japan will be expected to clearly explain how it estimates the neutral interest rate and assesses the accommodative nature of the current financial environment. The market tends to react excessively to each economic data release and official comment, making transparent communication important, analysts say.