How far can the Bank of Japan raise interest rates? Considering the upper limit from the neutral interest rate, CPI, and mortgages

On September 18, 2026, the Bank of Japan decided on a policy to raise the policy interest rate to approximately 1.25%. The new guideline for money market operations will be applied from September 24.

The Bank of Japan has indicated that, given that the underlying inflation rate is approaching 2% and the financial environment remains accommodative, it intends to continue adjusting the policy interest rate in accordance with economic, price, and financial conditions.

For those considering purchasing a home from this point on, a major question arises.
How far could the Bank of Japan’s policy interest rate potentially rise from here?
And,
what kind of impact will spread to mortgages when the policy interest rate advances to 1.50%, 1.75%, and 2.00%?

This time, we will consider this from four perspectives:
neutral interest rate
CPI
wages
mortgages
.

Understanding the “neutral interest rate” Knowing the “neutral interest rate” is important when considering how far the Bank of Japan’s interest rates will rise.
The neutral interest rate is the interest rate level where the stimulus and restraint on the economy and prices are in equilibrium.
The natural rate of interest re-estimated by the Bank of Japan in March 2026 is in the range of
-0.9% to +0.5% in real terms
.
Adding the Bank of Japan’s price stability target of 2% to this, the reference range for the neutral interest rate on a nominal basis is approximately
1.1% to 2.5%
.
The current policy interest rate of 1.25% is at the stage where it has entered the lower side of this range.
From here on, as it advances to
1.50%
1.75%
2.00%
2.25%
2.50%
, the impact on household borrowing costs will likely become stronger.
KANSODONews has organized the following as a guide for observation.

Policy Interest Rate Observation points from the perspective of mortgages
1.25% Current. Stage to confirm the ripple effect on mortgage interest rates
1.50% Upward pressure on new variable interest rates is likely to strengthen further
1.75% Impact on existing loans is also likely to spread gradually
2.00% Area where the center of the neutral interest rate is strongly conscious
2.25–2.50% Area to observe the impact on household burden and housing demand more strongly
*This classification is KANSODONews’s observational classification for organizing the ripple effects on the neutral interest rate and mortgages.

Q. What are the conditions for the Bank of Japan to raise interest rates above 1.25%?

There are 5 particularly important items.
1. Underlying inflation
In addition to temporary movements in energy and food, the Bank of Japan emphasizes the underlying inflation rate, which includes broad price increases and service prices.
In the monetary policy decision on September 18, it was evaluated that the underlying inflation rate is approaching 2%.
2. Wage increases
If wage increases continue, a cycle of
wage increases
→ rising labor costs
→ passing on to sales prices
→ rising prices
is likely to be formed.
When this cycle stabilizes, the Bank of Japan’s room for additional interest rate hikes is likely to expand.
3. Inflation expectations
If companies and households are strongly conscious of future price increases, the impact will spread to wage setting and sales prices.
The Bank of Japan also views medium- to long-term expected inflation rates as an important judgment material.
4. Yen exchange rate/crude oil prices
A weak yen and high crude oil prices ripple into domestic prices through import prices.
Changes in exchange rates and crude oil prices are also important materials for considering future prices.
5. Economy and financial environment
If capital investment, employment, consumption, and bank lending remain firm, the Bank of Japan will find it easier to proceed with additional interest rate hikes.

In other words, by following the 5 items of
underlying inflation,
wages,
inflation expectations,
yen exchange rate/crude oil prices,
and economy/financial environment,
the direction of additional interest rate hike pressure becomes easier to see.

Q. Can I think about the future of mortgage interest rates by looking at the CPI?

The CPI is an important observation material.
When viewed by mortgage users, it becomes easier to understand when viewed in the combination of
CPI
+ underlying inflation
+ wages
+ yen exchange rate
+ Bank of Japan’s monetary policy
.

In other words, it can be observed in the flow of
CPI rise
↓
underlying inflation rise
↓
additional interest rate hike pressure rise
↓
ripple to bank interest rates
↓
ripple to mortgage interest rates
.

KANSODONews also continuously tracks the
national CPI,
Tokyo metropolitan area CPI,
Bank of Japan’s underlying inflation indicator,
and wages.
Q. When the policy interest rate rises, how does it reach mortgage interest rates?

There is a time lag in the ripple effect of interest rates.
The rough flow is
Bank of Japan’s policy interest rate

↓
lending interest rates linked to short-term market interest rates
↓
ordinary deposit interest rates/short-term prime rate
↓
new variable mortgages
↓
existing variable mortgages
.

In recent examples, ordinary deposit interest rates and short-term prime rates move mainly around 2 months after policy changes, and then ripple to new variable mortgages, and further to existing loans.

Therefore, there is a time lag between the rise in the Bank of Japan’s policy interest rate and the rise in mortgage interest rates.

Q. What should people with variable interest rates especially know?

With variable interest rates, there are products where the review of the applied interest rate and the review of the monthly repayment amount move separately.
Representative ones are the

5-year rule
and the
125% rule
.
In the 5-year rule, a mechanism is used to keep the monthly repayment amount fixed for 5 years.

In the 125% rule, a mechanism is used where the upper limit is 125% of the previous repayment amount when reviewing the repayment amount after 5 years.
When interest rates rise, changes occur within the same repayment amount, such as

the proportion of interest increases
and the way the principal decreases becomes slower
.

For mortgage users, it becomes important to look at the
current applied interest rate,
monthly repayment amount,
breakdown of repayment amount,
and principal balance
.

Q. How much difference will it make with a 30 million yen mortgage?

Let’s look at a simple model of borrowing 30 million yen for 35 years with equal principal and interest repayment.

Mortgage interest rate Monthly repayment amount
1.0% about 84,700 yen
1.5% about 91,900 yen
2.0% about 99,400 yen
2.5% about 107,200 yen
3.0% about 115,500 yen

From 1.0% to 2.0%, it is calculated that the
monthly repayment amount increases by about 14,700 yen
.
Annually, it is
about 176,000 yen.

From 1.0% to 3.0%, it increases by about 30,800 yen per month.
Annually, it is about 370,000 yen.
This is a simple comparison where only the mortgage interest rate itself is changed.

In actual mortgages, the actual repayment amount changes depending on the applied interest rate, repayment method, interest rate review timing, 5-year rule, group credit life insurance, etc.

Q. What should people who are going to take out a mortgage look at?

From now on, it will be important to look at the household budget after the interest rate rise, along with the current offered interest rate.
For example, if the mortgage interest rate is currently 1%, it will be easier to grasp the repayment capacity if you calculate up to
1%,
1.5%,
2%,
2.5%,
and 3%

.
The items to look at are
monthly repayment amount,
annual repayment amount,
education expenses,
fixed asset tax,
management fees/repair reserve funds,
insurance,
living expenses,
and retirement funds
.

Along with the borrowing limit shown by the bank, the way of thinking of looking at the repayment amount that your household can continuously absorb is useful.

Q. How should I think about variable interest rates and fixed interest rates?

The point is where you accept future interest rate fluctuations.
With variable interest rates, future interest rate changes are reflected in the repayment conditions.
With the all-period fixed type, you can determine the future repayment interest rate at the time of borrowing.
With the fixed period selection type, you fix the interest rate for a certain period, and then move to new interest rate conditions.

Therefore, if you consider
income stability,
borrowing amount,
repayment period,
timing of education expenses,
savings amount,
and early repayment plans
together, it becomes easier to organize the interest rate type that suits you.

Q. Is the policy interest rate of 2% important for mortgages?

Around 2% is one important observation area.
The reference range for the nominal neutral interest rate shown by the Bank of Japan is
1.1–2.5%
.

In the phase where the policy interest rate advances to around 2%, it will be the stage to observe more carefully the impact on
mortgage interest rates,
repayment capacity of home buyers,
housing sales,
housing investment,
and lending stance of financial institutions

.

Around 2% of the policy interest rate will also be an important observation point for mortgage users.

Interest rate hikes also lead to housing prices
When mortgage interest rates rise, the amount that can be repaid monthly and the funds that can be used for home purchases change even with the same annual income.

As a result, the flow of
mortgage interest rate rise
↓
rise in purchaser’s repayment burden
↓
change in purchasable price
↓
change in housing demand
↓
ripple to housing prices/sales trends
is born.

Therefore, mortgage interest rates become an indicator for looking at the entire housing market, not just individual household budgets.

KANSODONews will observe
national CPI, Tokyo metropolitan area CPI, Bank of Japan’s underlying inflation indicator, wages, yen exchange rate, and policy interest rate in the future.
And, we will track the change in pressure advancing from
1.25% → 1.50%,
1.50% → 1.75%,
1.75% → 2.00%.
Furthermore, we will continuously record how that change ripples to

mortgage interest rates, new mortgages, existing variable loans, housing sales, and housing investment.
Summary

In September 2026, the Bank of Japan’s policy interest rate advanced to 1.25%.
The reference range for the nominal neutral interest rate shown by the Bank of Japan is
1.1–2.5%.
Currently, it is at the stage where it has entered the lower side of that range.
From here, as it advances to
1.50%,
1.75%,
2.00%,
the interest rate ripple effect on mortgages will become important.
For those who are going to take out a mortgage, it will be easier to grasp future household budget room by confirming with numbers the repayment amount when interest rates rise by 1% and 2%, along with the repayment amount at the current interest rate.
The Bank of Japan’s monetary policy is connected from the stock market to mortgages, and then to monthly household budgets.
KANSODONews will continue to observe “how the next interest rate hike reaches mortgages” while following the CPI and Bank of Japan policy in the future.
Published at any time on X “KANSODONews”.

https://x.com/KANSODONews
*Organized based on public materials from the Bank of Japan and the Financial Services Agency as of September 20, 2026. The classification of interest rate bands and observation categories for mortgages are analyses by KANSODONews.