What is the Policy Interest Rate? The Bank of Japan Controls the Interest Rate for Short-Term Lending Between Banks

What kind of interest rate is the “1.25%” mentioned in the news?

The “policy interest rate” mentioned in the news refers precisely to the uncollateralized overnight call rate target. A “target” is a goal set by the Bank of Japan to indicate the level it wants to achieve.

It is a complex term, but in short, it is the “interest rate for very short-term lending and borrowing between banks, lasting until the next day“. The Bank of Japan adjusts the financial market so that this interest rate stays around this level.

The important point here is the following:

• The Bank of Japan does not directly determine the interest rates for your mortgage or savings.

• What the Bank of Japan moves is the short-term interest rate between banks.

• After that, each bank decides its own lending and deposit interest rates based on its own judgment.

Therefore, “the Bank of Japan raised rates” does not necessarily mean “your loan rate will go up starting tomorrow.” There may be a time lag, and responses vary by bank.

Details of this decision

The content announced by the Bank of Japan on September 18, 2026, is as follows:

• Decided by a 7-2 vote to encourage the uncollateralized overnight call rate to remain at “around 1.25%” (an increase from “around 1.0%”).

• Decided by a 7-2 vote to set the interest rate applied to the Complementary Deposit Facility (the interest rate on money banks deposit with the Bank of Japan) at 1.25%, and the Basic Loan Rate (the benchmark interest rate when the Bank of Japan lends money to banks) at 1.50%.

• The new policy and interest rates were applied starting September 24, 2026.

In addition, reports state the following:

• This is the first rate hike in about three months, since June.

• It is reported that the background for this decision was the judgment that the risk of prices rising higher than expected has increased due to factors such as rising crude oil prices caused by the worsening situation in the Middle East.

• It is reported that 1.25% is the highest level in about 31 years.

Also, reports state that the rate was held at around 1.0% at the July meeting.

This article does not predict future interest rate movements. The Bank of Japan is said to make decisions while monitoring economic and price conditions.

What is written in the “Summary of Opinions” published on October 1st?

The Bank of Japan released the ‘Summary of Opinions’ from its meeting on October 1, 2026. It includes both supporting and opposing viewpoints.

Opinions in favor of a rate hike

• The economy and prices are generally on track (moving in line with forecasts)

• The underlying inflation rate is approaching 2%

• Financial conditions remain accommodative

Opinions against a rate hike

• Consumer prices are below 2% year-on-year, and the current economy is not necessarily strong

• Since the economic and price situation is not accelerating significantly, a rate hike at this timing is not appropriate

In addition, the situation in the Middle East, AI-related demand, and exchange rates are cited as factors that could cause prices to rise further. At the same time, crude oil prices, logistics costs, corporate price pass-through, and the interaction between wages and prices are indicated as factors to be monitored going forward.

This is not a ‘forecast for the next rate hike.’ It is best to think of it as material to understand what views exist within the Bank of Japan and what they are watching when making decisions.

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The route through which interest rates reach daily life: Short-term prime rates, base rates, and housing loans

What is the short-term prime rate?

The short-term prime rate is the benchmark interest rate used when banks lend money to highly creditworthy companies for short terms of one year or less. When the policy interest rate changes, major banks often revise their short-term prime rates.

What does the variable interest rate for housing loans track?

Variable interest rates for housing loans are generally determined by tracking not the short-term prime rate itself, but each bank’s base rate (the foundation rate used by that bank to set loan interest rates). It is said that many banks link this base rate to the short-term prime rate, but this may vary depending on the bank and the timing.

However, this is not true for everything. Some institutions, such as online banks, may use different benchmarks, such as linking to market interest rates.

In other words, ‘the short-term prime rate went up’ does not necessarily mean ‘my loan interest rate will go up immediately.’ Please check your contract or the bank’s official website to see what your loan is linked to.

What about this time (September)?

Following the September rate hike, major banks have announced the following. The application dates vary by bank so please compare them.

Short-term prime rate (Short Prime)

• MUFG Bank: Announced on September 18. Raised by 0.25 points from 2.375% to 2.625% per year. Applied from November 2, 2026

• Mizuho Bank: Announced on September 18. Raised from 2.375% to 2.625% per year. Applied from November 2, 2026

• Resona Bank / Saitama Resona Bank: Announced on September 24. Raised from 2.625% to 2.875% per year. Applied from November 2, 2026

• Sumitomo Mitsui Banking Corporation: Announced on September 28. Raised from 2.375% to 2.625% per year. Applied from November 9, 2026

Ordinary deposit interest rate

• MUFG Bank: Announced on September 18. From 0.4% to 0.5% per year. Applied from November 2, 2026

• Mizuho Bank: Announced on September 18. From 0.4% to 0.5% per year. Applied from November 2, 2026

• Resona Group 4 banks: Announced on September 24. From 0.4% to 0.5% per year. Applied from November 2, 2026

• Sumitomo Mitsui Banking Corporation: As of October 4, 2026, no official announcement regarding the revision of ordinary deposit interest rates following the September rate hike has been confirmed (only the revision of the short prime rate was confirmed).

It is not the case that ‘all major banks are on November 2’; the short prime rate for Sumitomo Mitsui Banking Corporation is November 9. Also, while there is a possibility that an announcement regarding Sumitomo Mitsui Banking Corporation’s ordinary deposit interest rate will be made in the future, it is unknown at this time.

Movements toward mortgage loans (variable interest rates)

Following the September short prime rate hike, MUFG Bank has officially announced that it will revise the base interest rate for variable rate mortgages starting December 1, 2026.

After the revision of the base interest rate, the reflection in actual repayment amounts may occur even later, depending on the interest rate revision method and the repayment date. Please check the bank’s guidance to see from which repayment period the change will take effect.

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Mortgage loans: Variable interest rates do not necessarily mean repayment amounts will increase ‘immediately’

Even with variable interest rates, repayment amounts may not increase immediately

Mortgage repayment methods include ‘equal principal and interest repayment,’ where the monthly repayment amount remains almost constant, and ‘equal principal repayment,’ where the amount of principal reduction is constant and the repayment amount decreases little by little.

Among variable rate mortgage loans, some banks’ ‘equal principal and interest repayment’ plans adopt the following rules:

• 5-year rule: Even if the interest rate changes, the repayment amount will not change for 5 years. Instead, the breakdown of ‘principal’ and ‘interest’ within the repayment amount is adjusted.

• 125% rule: When reviewing the repayment amount every 5 years, the new repayment amount will be capped at 125% of the previous amount.

MUFG Bank, Mizuho Bank, and Sumitomo Mitsui Banking Corporation officially provide information on these rules for principal and interest equal repayment. On the other hand, there are also confirmed cases where principal equal repayment does not have these two rules.

Both are mechanisms to mitigate the burden on household finances when repayment amounts increase suddenly. However, they are not “guaranteed to exist with a variable interest rate.”

Also, while many products review variable interest rates periodically, such as twice a year, the timing and method of reflection vary by bank and contract. Even within the same bank, there are cases where both “monthly type” and “twice-a-year type” coexist.

But there is an “invisible burden”

This is an important point.

Even if there is a 5-year rule, it does not mean that the “burden of rising interest rates disappears.” Even while the repayment amount is fixed, if interest rates rise, the proportion of interest within the repayment amount increases, and the reduction of the principal slows down. Even though the monthly payment amount is the same, it is possible that the remaining debt will not decrease as much as you expected.

Furthermore, it is noted that if interest rates rise sharply, the repayment amount may not cover the interest, potentially leading to “unpaid interest” (interest that could not be paid with that month’s repayment amount, which is carried over to a later date).

For example, out of the monthly repayment amount,

• When interest rates are low: Interest is low, and more goes toward the principal

• When interest rates are high: Interest increases, and less goes toward the principal

This is the image. Please note that “repayment amount has not increased” does not mean “the burden has not increased.” Avoid understanding it as if there is “no impact for 5 years.”

There are also loans without these rules

Not all loans have the 5-year rule or the 125% rule. In addition to principal equal repayment, it is explained that some online banks have products that do not have these rules.

Be sure to check your own loan agreement or the bank’s official website.

What about fixed interest rates?

• Those who have already borrowed at a fixed interest rate: The interest rate will not change during the fixed period

• Those who are going to borrow: Fixed interest rates for new contracts are more heavily influenced by long-term interest rates (market interest rates for longer periods) than by policy interest rates. They may move differently from policy interest rates

A ‘formula’ for considering your own burden

Here, I will not use hypothetical numbers. I will only write about the way of thinking.

Estimate of annual interest increase ≒ Loan balance × Interest rate increase margin

If you know your loan balance and what percentage your applicable interest rate will change from and to, you can get a rough estimate.

However, this is just an estimate. Please note the following points.

• As repayment progresses and the balance decreases, the estimate will also become smaller

• Bonus payments, etc., are not included

The actual repayment amount varies depending on the repayment method and the remaining period. Please check the exact figures using your bank’s repayment simulation or at the counter.

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Deposits: Reflection in interest rates varies by bank

Deposit interest rates are also determined by each bank

Deposit interest rates are also not directly determined by the Bank of Japan. Each bank revises them on its own in response to changes in the policy interest rate.

This time, as in the previous chapter, Mitsubishi UFJ Bank, Mizuho Bank, and four Resona Group banks have announced an increase in ordinary deposit interest rates. The content is from 0.4% to 0.5%, and both will be applied on November 2, 2026.

For these banks, it is not a situation of ‘there is a possibility of an increase,’ but rather ‘an increase has been announced.’ On the other hand, regarding the ordinary deposit interest rate of Sumitomo Mitsui Banking Corporation, I have not been able to confirm an announcement as of October 4.

Therefore,

• there are banks that will revise and banks that will not (or banks that have not yet announced)

• the dates and margins of revision also differ by bank

• the way movements occur can differ between ordinary deposits and time deposits

This is the situation.

Looking at it in comparison with ‘prices’

When deposit interest rates rise, another thing you want to look at is how prices are rising.

Concept of Nominal Interest Rate − Inflation Rate = Real Interest Rate

The “nominal interest rate” is the interest rate you see displayed on things like your bank passbook. The “real interest rate” is the interest rate viewed in terms of purchasing power, calculated by subtracting the rate of price increases from the nominal rate.

Even if deposit interest rates rise, if prices rise even more, your money’s purchasing power may actually decrease. Note that the current level of real interest rates is not covered in this article.

By looking at price indicators in addition to deposit interest rates, you can make a well-balanced judgment.

About Deposit Insurance

For deposits, there is a protection mechanism (deposit insurance) in place in case a financial institution fails. However, the scope and conditions of protection vary depending on the type of deposit. This article does not cover this in detail, so if you need more information, please check the official information from the Financial Services Agency or the Deposit Insurance Corporation of Japan.

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How to think about it in terms of the economy and FX? The relationship between interest rate hikes and the yen

In news about interest rate hikes, the question of “will the yen strengthen?” often comes up. This is also something I would like to avoid making definitive statements about.

The relationship between interest rate differentials and the yen

Generally, when interest rates in Japan rise, the appeal of holding yen increases, so it can become a factor that makes the yen more likely to be bought. This is the perspective that the interest rate differential with overseas markets narrows. However, there are also phases where the yen weakens after an interest rate hike.

Exchange rates are not determined by a single reason.

• Movements in U.S. interest rates

• Prices of resources such as crude oil

• Whether many people anticipated the interest rate hike in advance and it was already reflected in the market (if it goes as expected, it may not move much)

• Global economic conditions and risk-aversion movements

and others all have an impact simultaneously. It is dangerous to conclude that “interest rate hike = stronger yen.”

Connection to daily life

It is said that when the yen weakens, the prices of imported goods tend to rise, and when the yen strengthens, they tend to fall. This is also a topic connected to the prices in our daily lives.

However, this article does not cover the level of the dollar-yen exchange rate (how many yen per dollar) following this interest rate hike. Please always check the latest primary sources for market figures.

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Points for Beginners (Checklist)

If you are unsure where to start, please check in the following order.

Your Loan

• Is it a variable or fixed interest rate?

• What interest rate is it linked to (base rate, market rate, etc.)?

• Is it principal and interest equal repayment or principal equal repayment, and is it a contract subject to the 5-year rule or 125% rule?

• When is the next interest rate review, and from which repayment period will it be reflected?

Savings

News

We have organized into seven points for beginners the items cited by the Bank of Japan as decision-making factors in documents such as the ‘Summary of Opinions’ from October 1st. Please use this not as a list to predict the next interest rate hike, but as a guide when reading the news.

1. Is the underlying inflation rate stable around 2%?

2. The wage-price cycle (the flow where rising wages influence prices)

3. Trends in personal consumption and domestic demand

4. Crude oil prices and the situation in the Middle East

5. Overseas factors such as AI-related demand

6. Exchange rate movements

7. The impact of previous interest rate hikes on households, businesses, and the financial environment

In addition, checking the schedule for the Bank of Japan’s next Monetary Policy Meeting (which can be confirmed on the Bank of Japan’s website) and the “Summary of Opinions” published after the meeting will make it easier to grasp the flow of the discussion.

Regarding Early Repayment and Refinancing

Early repayment and refinancing may involve fees and conditions. Which one is suitable depends on the individual. This article does not recommend any specific decisions. If you are concerned, please check your own conditions at your financial institution’s counter or a public consultation service.

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Points to Note

• The future cannot be determined: Future interest rate hikes, exchange rates, and interest rate levels are unknown.

• It varies by bank: The revision dates, margins, and announcement timing vary by bank, and notices may be added in the future. Please check the official website of the bank you use.

• Not an individual recommendation: This article does not recommend refinancing or switching deposits.

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Summary

• The “1.25%” in the news is the interest rate for short-term lending and borrowing between banks (the policy interest rate). It is not the interest rate on your loan or deposit itself. It is reported to be at its highest level in about 31 years.

• The impact may reach you with a time lag in the order of: BOJ interest rate → Bank benchmarks (such as the short-term prime rate) → Your loans/deposits. Fixed interest rates are mainly affected by long-term interest rates.

• Following the September interest rate hike, Mitsubishi UFJ, Mizuho, and Resona have announced revisions to their short-term prime rates and ordinary deposit interest rates, while Sumitomo Mitsui has announced a revision to its short-term prime rate. The application dates are November 2 and November 9, which vary by bank.

• Even with variable rate loans, for contracts that apply the 5-year rule and the 125% rule (such as equal principal and interest repayment), the repayment amount may not increase immediately. However, it is worth noting that interest increases and the principal becomes harder to reduce.

• Deposit interest rates are revised by each bank. It is important to look at them in comparison to how prices are rising.

• The yen exchange rate after an interest rate hike is not determined solely by interest rate differentials, so it cannot be determined.

First, you should check the following three points.

1. Your loan conditions (variable or fixed, repayment method, benchmark interest rate, 5-year/125% rule, review timing)

2. Official announcements from the bank you use (revision dates and figures)

3. The schedule for the next BOJ meeting and the “Summary of Opinions” (also refer to the confirmation materials raised in the October 1st publication)

The numbers in the news feel distant as they are. However, if you “translate” them into your own contracts and bank notices, they become much more relevant. First, try opening one of your loan agreements or bank notices at hand.