Bank of Japan Raises Rate to 1.25%, Highest Since 1995; Yen Carry Trade and Indian Stocks
The Bank of Japan's 18 September hike to 1.25% is its highest rate since 1995. Here is how the yen carry trade links it to Indian stocks and foreign flows.
On 18 September 2026, the Bank of Japan raised its policy interest rate by 0.25 percentage points, from 1% to 1.25%. That is the highest level since 1995. The Policy Board voted 7–2, with Toichiro Asada and Ayano Sato dissenting.
For readers in India and abroad, one link is the yen carry trade. A rate rise in Tokyo makes borrowing in yen more expensive. Investors borrow yen at low interest rates and invest the proceeds in higher-yielding assets elsewhere, such as US shares and emerging market bonds. This explainer covers how the trade works, what the reported figures show for India, and the dates to track before the next decision.
Why the Bank of Japan Raised Rates on 18 September
The hike followed a slide in the yen. According to UPI, the currency fell to nearly 164 per US dollar in July, close to its weakest level in roughly four decades. Between 30 July and 26 August, Japan spent a record 15.4 trillion yen supporting the currency.
Ventura Securities gives the July low as 163.99 per dollar, a roughly 40-year low, before coordinated intervention provided support. UPI says the US and South Korea took part in that intervention, while Ventura Securities refers to coordinated action by Japan and the US.
Inflation was also a concern. Core consumer prices, which exclude fresh food, rose 1.7% in August from a year earlier. UPI reports concern that higher crude oil prices and a weaker yen could push prices higher. The Bank targets 2% inflation.
At the news conference that day, Governor Kazuo Ueda said underlying inflation had approached the 2% target. He said the Bank would act pre-emptively to avoid sharp rate increases that could harm the economy, according to Investing.com's summary of his remarks.
The US Federal Reserve had raised its own policy rate by 0.25 percentage points two days earlier, UPI reports. UPI says the move kept a substantial interest rate gap between the two countries.
The 18 September decision came three months after a June increase, UPI reports. That was the shortest interval between rate rises since the Bank ended its large-scale easing in March 2024.
How the Yen Carry Trade Works
In a yen carry trade, an investor borrows yen at a low interest rate and invests the proceeds in an asset that pays more. The trade is profitable while Japanese rates stay low and the yen stays weak.
When the BoJ raises rates, borrowing in yen becomes more expensive and the yen tends to strengthen, which squeezes those positions from both sides and can force rapid selling of assets far from Tokyo.
On 18 September, Ueda said the Bank does not aim to control exchange rates directly. Its policy takes account of how currency market volatility could affect domestic inflation, according to Investing.com's summary of his news conference.
Ventura Securities frames the decision around global markets, saying higher Japanese rates can affect global capital flows as domestic returns improve.
How Higher Japanese Rates Can Affect Global Capital Flows
A rate increase in Japan makes borrowing in yen more expensive, and Ventura Securities says it could also reduce the attractiveness of yen-funded carry trades.
When the BoJ tightens, carry trades unwind and Japanese capital flows home, which can push down global share prices.
Ventura Securities attributes the muted yen reaction on 18 September to the hike having been largely priced into financial markets.
Ventura Securities says Japanese investors and institutions may reassess investments in overseas assets as domestic returns improve.
Ventura Securities also says the BoJ, the US Federal Reserve and the European Central Bank have all raised borrowing costs in the same month. It describes this as a notable shift in global monetary policy.
Foreign Flows Into and Out of Indian Equities in 2026
According to The Hans India, foreign portfolio investors made a net withdrawal of ₹35,861 crore from Indian equities in September 2026. Cumulative withdrawals for 2026 had reached ₹3.04 lakh crore by 12 October.
The same report gives outflows of ₹44,166 crore in October so far, and inflows of ₹20,200 crore in July 2026 and ₹29,631 crore in August 2026. For 2025 as a whole, it reports outflows of ₹1.66 lakh crore.
The Hans India says elevated crude oil prices, a firmer US dollar and higher US bond yields weigh on investor sentiment. It also says the AI-led rally in North Asian markets attracts higher foreign capital.
Taken together, the monthly figures show inflows in July and August and outflows from September, with October's outflows so far.
A rate rise in Tokyo makes borrowing in yen more expensive.
How Indian Indices Traded Early on the Day of the Hike
In early trade on Friday, 18 September, at about 9.25 am, the Sensex was up 177.61 points, or 0.24%, at 74,501.32, and the Nifty 50 was up 46.40 points, or about 0.2%, at 23,315.20, according to Ventura Securities. Ventura gives the Nifty gain as 0.19%. These are early-trade readings, not closing levels.
Ventura Securities says there was no broad, direct move in Indian stocks attributable solely to the Bank of Japan's decision in early trade.
Ventura Securities says sectoral movements were influenced by multiple factors, including crude oil prices, global equity trends and domestic flows.
Dates and Figures to Track Before the Next Decision
The next Bank of Japan decision follows a two-day meeting on 29 and 30 October 2026, which includes an Outlook Report. Finance Calendar says the policy statement usually comes between 11.30 am and 12.30 pm Japan time on the second day, with Governor Kazuo Ueda's press conference at 3.30 pm JST. In Indian time, the statement falls between about 8 am and 9 am IST. The same page says contentious discussions can push the release into the early afternoon.
The yen is the first figure to follow. It fell 0.5% to 156.75 per dollar immediately after the 18 September announcement, according to Ventura Securities, after nearing 164 in July.
For India, the monthly NSDL flow data is the figure to follow, and The Hans India links outflows to US bond yields, crude oil prices and the US dollar. On the Japanese side, the 1.7% August core inflation rate, reported by UPI, is the latest figure in these sources. The meeting after October is scheduled for 17 and 18 December 2026.
Ventura Securities says the BoJ reiterated that it would continue raising rates if its economic and price outlook develops as expected, and places the 1.25% rate at the lower end of the estimated neutral-rate range. At the news conference, Ueda said the pace of further hikes depends on how price conditions develop and that it is hard to pinpoint where the neutral rate is.
