The Bank of Japan raised interest rates to 1.25% in September 2026, while inflation remains at 2.6% and household spending has recorded eight months of year-on-year declines.
The Bank of Japan (BoJ) increased its benchmark interest rate to 1.25% at its monetary policy meeting in September 2026, according to data released by the central bank and reported by vietnam.vn. The decision comes with inflation above the target: the consumer price index, excluding fresh food and special items, rose 2.6% year-on-year in August 2026, compared to the 2% target set.
Private consumption, which accounts for more than 50% of the Japanese economy, barely grew in the second quarter of 2026. In July, inflation-adjusted household spending had fallen for another year, marking eight consecutive months of year-on-year declines.
This weakness in demand pressures corporate results. Ide Shingo, equity strategist at the NLI Research Institute, warns that companies unable to pass on rising costs to prices will face sustained pressure on their profits.
"As costs rise across all sectors, companies that cannot pass these costs onto buyers through price increases will face constant pressure on their earnings, making their business operations more difficult"
Monetary policy is caught between two risks. A hasty rise in rates could stifle activity, but a weakened yen and rising import costs push prices up, forcing the central bank to maintain a restrictive bias. Yen fluctuations complicate this calculation: even after the coordinated intervention of Japan and the United States in the foreign exchange market, the currency remained under selling pressure.
The Federal Reserve also raised rates, so the interest rate differential between the two countries barely narrowed, and the yen did not achieve a significant recovery.
On the fiscal front, Morita Kyohei, chief economist at Nomura Securities, argues that the policy of Prime Minister Takaichi Sanae's government has raised inflation expectations and increased market concern that the BoJ is falling behind. A Reuters survey shows that 89% of economists consulted expect Japanese fiscal policies to lead to greater yen depreciation, particularly regarding funding measures such as tax cuts on food and increased investment.
Japan's public debt has been at high levels relative to its GDP for years. With bond yields rising, the debt burden translates into increasing pressure for interest payments. The resulting picture combines lower consumer spending, higher business costs, and more fiscal pressure, with little room for economic policymakers.
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