Why did the Bank of Japan raise interest rates? Reading the speech by Policy Board Member Takata

When we hear that the Bank of Japan is raising interest rates, the first thing that comes to mind might be home loans.

If interest rates rise, the burden on those with variable-rate home loans will increase.

For companies, the cost of borrowing money also goes up.

So, why does the Bank of Japan raise interest rates despite this?

“We are raising rates because of inflation.”

Of course, that is one of the reasons.

However, reading the speech delivered on September 2, 2026, by Hajime Takata, a member of the Bank of Japan’s Policy Board, it becomes clear that what the BOJ is looking at is a bit more complex.

Global economy, overseas interest rates, exchange rates, crude oil, corporate earnings, wages, capital investment, and inflation expectations.

While watching these many factors simultaneously, the BOJ is considering both the “risk of raising interest rates” and the “risk of not raising interest rates.”

That is how it appeared to me.

In this article, based on Mr. Takata’s speech, I will organize the Bank of Japan’s approach to interest rate hikes in order.

Knowing this perspective should be useful for various analyses when considering future interest rate hikes, the weak yen, prices, and home loans.

1 Why were the interest rate hikes in 2024 and 2025 so slow?

Japan began to move toward normalizing interest rates starting in 2024, emerging from a long period of monetary easing.

However, at that time, the rest of the world was looking in a different direction than Japan.

Mr. Takata calls 2024–25 the “second phase of normalization” and explains that the direction of monetary policy was fundamentally opposite to that of overseas.

While Japan was scaling back monetary easing, there were moves toward monetary easing overseas.

If only Japan were to rush into raising interest rates in this state, the interest rate differential between domestic and international markets could change rapidly, potentially causing significant movement in financial markets, centered on exchange rates.

Therefore, regarding the interest rate hikes in 2024–25, Mr. Takata describes it as

“threading a needle while waiting for a break in the clouds.”

As a result, the interest rate hikes were carried out over time.In other words, the reason the BOJ was cautious was not just because of the Japanese economy.

They were also looking at the combination with global monetary policy.

This is the first point.

2 So, what changed in 2026?

Mr. Takata positions 2026 as the “third phase of normalization.”

What has changed significantly is the overseas economy and monetary policy.

Against the backdrop of strong demand, centered on global AI investment, it has become necessary to be vigilant about inflation overseas as well.

As a result, Mr. Takata explains that overseas monetary policy has also shifted toward raising interest rates.

In other words, from a state of

“Japan moving toward rate hikes, while overseas moves toward easing,”

the “vector” of monetary policy has aligned toward

“both Japan and overseas moving toward rising interest rates.”

The risk of causing major fluctuations in financial markets by having only Japan move in the opposite direction is different from before.

On the other hand, if overseas interest rates are also high, the interest rate differential with Japan will not easily disappear.

If the interest rate differential remains, import prices may rise through a weak yen, which could potentially spill over into domestic prices.

Therefore, for the Bank of Japan, it has become necessary to consider not only the

“risk of raising rates and cooling the economy too much”

but also the“risk of delayed rate hikes leading to upward pressure on prices”

more seriously than before.

Mr. Takata sees 2026 as the year that balance changed.

3 Why can they raise interest rates despite high crude oil prices?

This is an important part for understanding the Bank of Japan’s way of thinking.

If you think about it normally, rising crude oil prices have a negative impact on Japan.

Import costs increase.

Corporate costs rise.

The burden on households also increases.

If that’s the case, wouldn’t raising interest rates further worsen the economy?

It is natural to think so.

In fact, Mr. Takata initially thought that the surge in crude oil prices due to the situation in the Middle East would be a factor in slowing down the Japanese economy through the deterioration of terms of trade.

However, he states that so far, no noticeable slowdown has occurred in the Japanese economy.

Wages are chasing prices, and real wages have also turned positive.

There is also resilience in capital investment.

In other words, the economy has not collapsed as much as expected.

Then, the shape of the problem changes.

If “prices rise due to high crude oil prices, and at the same time the economy worsens significantly,” then one must be cautious about raising interest rates.

However, if “the economy does not collapse that much, but upward pressure on prices due to high crude oil prices remains,” then one needs to be vigilant about inflation overshooting.

Mr. Takata has judged that it is necessary to correct the significantly negative real policy interest rate, taking into account price increases associated with the Middle East situation, the rise in inflation expectations, and the strength of demand centered on global AI investment.

What is important here is that just because they are watching high crude oil prices does not mean they will always postpone interest rate hikes.

To what extent is the high price of crude oil cooling the economy?

On the other hand, to what extent will price increases continue?

They are making decisions while watching both.

4 Are interest rate hikes meant to “worsen the economy”?

If you raise interest rates, the economy will be braked.

This is because interest rates on home loans and corporate loans rise, which works to suppress consumption and investment.

However, it seems a bit off to think that the current Bank of Japan is trying to suddenly slam on the brakes.

What Mr. Takata emphasizes is the real interest rate.

The real interest rate is the interest rate that takes into account the impact of price increases from the nominal interest rate.

Although Japan’s real interest rates have risen, Mr. Takata points out that they are still at a low level compared to overseas.

In other words, although they are raising interest rates, they believe that the financial environment itself is still quite accommodative.

As an image, it might be easier to understand it as

gradually easing off the accelerator that had been pressed for a long time, rather than slamming on the brakes.

Moreover, we are currently changing from an era where companies and households acted on the premise that prices would not rise, to an era where both wages and prices move.

In that state, if price increases due to high crude oil prices and a weak yen are added, temporary price hikes could spread to sustainable price increases through wages, corporate pricing, and inflation expectations.

That is why Mr. Takata states that

it is necessary to show the market the BOJ’s intention to prevent price overshooting and to be mindful of the impact through the foreign exchange market.
Interest rate hikes are not simply done to worsen the economy.
They are also adjustments to ensure that price increases do not go too far.

5 So, how far will they raise interest rates?

Here, the term “neutral interest rate” comes up.

Simply put, it is an interest rate that neither stimulates nor suppresses the economy.

If so, it might seem like they should just calculate the neutral interest rate and raise interest rates to that level.

However, Mr. Takata does not think so simply.

In this speech, he clearly states,

“We are not aiming for a pre-assumed neutral interest rate.”

Furthermore, he states that they are not bound by a certain interval or width of interest rate hikes.

Then, what will they look at?

They will check how accommodative the domestic financial environment is, along with the overseas economic and financial environment.

In other words, it is the following flow:

Move interest rates.

↓

See how the economy reacted.

↓

If the financial environment is still too loose, consider the next rate hike.

↓

If it has tightened sufficiently, make a judgment based on that situation.

They are not deciding from the beginning to “raise interest rates to X%” and mechanically aiming for that.

They think about the next move while watching the economy’s reaction.

This is the basic thinking of the current Bank of Japan as explained by Mr. Takata.

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Thinking about it with home loans

From here on, this is not Mr. Takata’s speech itself, but an example for me to understand it.

When thinking about home loans, the difficulty of monetary policy becomes easier to understand.

If the Bank of Japan raises interest rates, it will create a burden for those who have borrowed home loans with variable interest rates.

Therefore, one wants to think,

“Raising interest rates is bad because home loans will go up.”

But we also need to think about what happens if they don’t raise interest rates.

If low interest rates lead to upward pressure on the weak yen and import prices, the burden could extend to households that do not have home loans through food, energy, etc.

Therefore, monetary policy cannot be decided only by “who will be troubled if we raise interest rates.”

We also need to think at the same time about “what will happen if we don’t raise interest rates.”

On the other hand, if they raise interest rates rapidly, it might cool housing demand rapidly.

If real estate prices and collateral values fall, it will not just be a problem of home loans.

It could also affect corporate loans and the financial system.

Therefore, when they move interest rates, they watch the subsequent reaction of the economy.

What happened to the housing market?

What happened to corporate loans?

How is capital investment?

How is consumption?

Are wages rising?

What happened to prices?

How did exchange rates move?

They make the next judgment while confirming these changes.

Thinking about it this way, monetary policy is not a simple binary choice of “raise interest rates or not.”

Rather, it starts to look like they are searching for “what is the speed at which the economy can adapt?”

“Looking only at the pain of rate hikes is not enough”

Reading Mr. Takata’s speech this time, this was where my impression changed the most.

The Bank of Japan is not looking only at the inflation rate, nor only at the yen exchange rate.

Global economy.

Overseas monetary policy.

Exchange rates.

Crude oil.

Corporate earnings.

Wages.

Capital investment.

Consumption.

Inflation expectations.

And the domestic financial environment.

They are looking at these not separately, but as connected things.

Moreover, if the Bank of Japan itself moves interest rates, that impact returns to the economy through housing, corporate loans, capital investment, consumption, etc.

Therefore,

there is a risk in raising interest rates.

But,

there is also a risk in not raising interest rates.

The Bank of Japan is searching for the speed at which to exit the long-lasting large-scale monetary easing while comparing both.

Mr. Takata thinks of 2026 as a new phase different from 2024–25.

The direction of monetary policy has aligned with overseas, and Japan has returned to being a “normal country” that has regained its linkage with overseas.

That is precisely why it is necessary to make flexible judgments by looking at the domestic and international situation at the time, rather than mechanically repeating past interest rate hike paces.

At least as far as I read this speech, I understood the Bank of Japan’s monetary policy as follows:

The Bank of Japan is not raising interest rates just to worsen the economy. While comparing the pain of rate hikes and the risk of price increases that arise from not raising rates, they are searching for the speed at which the economy can adapt.

If you have this perspective, I think you will be able to verify future interest rate hikes, the weak yen, prices, home loans, corporate loans, etc., from various angles, rather than just simple agreement or disagreement.

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Reference materials

Bank of Japan

Hajime Takata, Member of the Policy Board

“Japan’s Economic and Price Situation and Monetary Policy”Summary of remarks at the Sapporo Financial and Economic Meeting

September 2, 2026※ This article is organized by the author regarding monetary policy, focusing on the above speech. As Mr. Takata himself indicates in the speech, the parts regarding monetary policy include his personal views.