[News] Bank of Japan raises policy interest rate to 1.25%, impacting mortgages and more

The Bank of Japan decided at its September 2026 Monetary Policy Meeting to raise the policy interest rate to 1.25%. This move is in response to risks of upward pressure on prices due to high crude oil prices and a weak yen, and will have widespread effects on households and businesses, such as rising mortgage rates and increased corporate interest payment burdens.

Raising the policy interest rate to 1.25% and trends in financial markets

The first additional rate hike in three months and the background to the BOJ’s decision

At the Monetary Policy Meeting held on September 17 and 18, 2026, the Bank of Japan decided to raise the policy interest rate, which is the target for the uncollateralized overnight call rate, by 0.25 percentage points from the previous level of around 1.0% to around 1.25%. This is the sixth hike in the current tightening cycle since the negative interest rate policy was ended in March 2024. It is an unusual pace, coming just three months after the previous hike at the June 2026 meeting, and the 1.25% level is the highest in approximately 31 years, since 1995. Although two of the nine policy board members voted against the decision at this meeting, it was passed by a majority.

The background to the BOJ’s decision to implement an additional rate hike in such a short period lies in a strong sense of caution regarding the risk of upward pressure on prices due to successive external shocks. With the escalation of tensions in the Middle East in September 2026 threatening passage through the Bab el-Mandeb Strait, the price of WTI crude oil rose to around $100 per barrel. Furthermore, the combination of soaring non-ferrous metal prices due to the global expansion of artificial intelligence-related demand and the ongoing depreciation of the yen, which pushes up import prices, has led to a rapid pace of price pass-through from upstream to downstream. As the underlying inflation rate approaches the 2% target, it was judged appropriate to adjust the degree of monetary easing to prevent a situation where prices rise more rapidly than anticipated. Please refer to the figure below.

Financial market reaction and the mechanism of interest rate formation

This 0.25 percentage point rate hike had been widely priced into financial markets in advance. From late August to early September 2026, U.S. Treasury Secretary Scott Bessent mentioned concerns regarding Japan’s departure from reflationary policies and the weak yen, and there were successive remarks from BOJ policy board members suggesting a flexible response. In response to these, the degree to which a September rate hike was priced into the overnight index swap market reached around 98% just before the decision, making it a decision that was in line with market participants’ expectations.

The fact that the policy interest rate has reached 1.25% has significant implications for the interpretation of monetary policy. The estimated range for the nominal neutral interest rate (the level of interest rates that neither overheats nor cools the economy) calculated and published by the BOJ in March 2026 was 1.1% to 2.5%, and with this rate hike, the policy interest rate has exceeded the lower bound of that range. While previous rate hikes were positioned as normalization from the extraordinary easing, the focus will now shift to assessing the restrictive effects of reduced monetary easing on the real economy. Long-term interest rates, such as the yield on newly issued 10-year Japanese government bonds, have also risen to the 3% range, and a world with interest rates where both short- and long-term rates are rising is becoming established.

Impact on households and changes in mortgage burdens

Mortgage rate increases and repayment simulations

Following the hike in the policy interest rate, upward pressure is also being applied to mortgage rates at financial institutions. Variable mortgage rates, which tend to be linked to the policy interest rate, have risen by 0.25 percentage points at major city banks to around 1.20% to 1.45% after preferential treatment, and fixed-rate types linked to long-term interest rates (such as the minimum rate for Flat 35) are also expected to rise to around 3.22% to 3.46%. Since the proportion of variable-rate mortgages in Japan’s total mortgage balance has reached over 70%, the impact will spread not only to new borrowers but also to existing ones.

We will perform a calculation using a model case for specific changes in repayment amounts. Assume a variable-rate mortgage with a loan amount of 40 million yen and a 35-year repayment period, borrowed at an initial interest rate of 1.20%, with the rate rising to 1.45% in the second year of repayment. If the so-called 5-year rule, which revises the repayment amount every five years, is applied, the monthly repayment amount from the first to the fifth year will remain fixed at 117,000 yen (1.399 million yen per year), but the proportion of interest will increase, slowing the reduction of the principal. Then, in the sixth year, the monthly repayment amount will become 122,000 yen (1.465 million yen per year), an increase of approximately 5,500 yen per month (approximately 66,000 yen per year). Comparing the total repayment amount over 35 years, this is an increase of approximately 1.97 million yen compared to a scenario with no interest rate hike. Please refer to the figure below for an image of mortgage repayments.

Rising deposit interest rates and the disparity in gains and losses between generations

On the other hand, the rise in the policy interest rate also brings the positive aspect of increased interest income from household deposits. The ordinary deposit interest rate is expected to be raised by 0.1 percentage points from 0.4% to 0.5%, and the 10-year time deposit interest rate is also expected to rise from 1.98% to 2.13%. Calculating on a macro basis for households as a whole, the increase in deposit interest income (approximately 0.9 trillion yen per year) exceeds the increase in interest payment burdens such as mortgages (approximately 0.5 trillion yen per year), resulting in a net positive effect of approximately 0.4 trillion yen per year. On average for households with two or more people, this calculates to a positive impact of approximately 6,000 yen per household per year.

However, this calculation varies significantly depending on the generation and whether or not they hold debt. Elderly households in their 60s and 70s or older, who have accumulated financial assets, can enjoy a significant positive impact of around 20,000 yen per year from the increase in deposit interest. In contrast, households as a whole that carry debt such as mortgages will see a negative impact of approximately 19,000 yen per year. Looking by age group, households in their 20s, who are in the home-buying stage, will see an increase in burden of approximately 50,000 yen per year, and households in their 30s will see an increase of approximately 41,000 yen per year, which will become a factor squeezing the disposable income of young people and child-rearing households who took out large loans during the low-interest-rate era.

Ripple effects on corporate performance and the outlook for the Japanese economy

Increased interest payment burdens for companies with interest-bearing debt and pressure on earnings

The additional rate hike also has a direct impact on corporate management through rising procurement interest rates. According to calculations based on all sizes and all industries (excluding finance and insurance), the increase in interest payments on interest-bearing debt due to rising interest rates will push down the ordinary profit of companies as a whole by 0.4%, which amounts to a profit reduction pressure of approximately 0.5 trillion yen per year. While the downward pressure is limited to about 0.2% for large companies with capital of 1 billion yen or more, it is 2.8% for small companies with capital of less than 10 million yen, as smaller companies are more susceptible to the impact because their profit margins relative to debt are lower.

According to analysis by private research institutions, the average corporate borrowing interest rate for fiscal year 2025 has reached 1.34%, the highest level in six years. If borrowing rates were to rise by an additional 0.25% from this point, approximately 168,000 companies nationwide holding interest-bearing debt would face an average annual increase in interest payments of 460,000 yen per company, pushing down ordinary profit by an average of 1.9%. As a result, it is estimated that approximately 2,700 companies nationwide (1.6% of the total) would fall from ordinary surplus to ordinary deficit. The real estate industry, which carries particularly high levels of debt, would be hit significantly, with an increased burden of approximately 2.3 million yen per company annually, pushing down ordinary profit by 5.4%.

Medium- to long-term outlook for the Japanese economy during a period of rising interest rates

Regarding the future path of monetary policy, major economists expect the policy interest rate to be raised to 1.5% at the December 2026 policy board meeting, reaching 1.75% in the January-March quarter of 2027. If upward pressure on prices becomes entrenched, the terminal rate could potentially be explored at levels exceeding 2.0% to 2.5%. As a “world with interest rates” takes hold, the question is whether the Japanese economy can maintain sustainable growth.

As a medium- to long-term challenge, it is essential for companies to strengthen their profit structures by improving their return on invested capital (ROIC), utilizing capital efficiently, and passing on costs appropriately. On the household side, whether wage growth can continue to outpace the increase in mortgage repayment burdens caused by rising interest rates will determine the outlook for the economy. Although high-level base pay increases have continued since 2025, there is a risk that if price and interest rate hikes are longer-lasting than anticipated, it could dampen household consumption. Promoting the normalization of price pass-throughs and the entrenchment of wage hikes through public-private cooperation to increase resilience to rising interest rates will be the most important task for the Japanese economy moving forward.

Reference pages

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