The Bank of Japan raised its policy rate to 1.25% from 1.0%, the highest level in 31 years and its first increase in three months. Economists expect the central bank to maintain a faster tightening pace of 25 basis points every three months, although estimates for the terminal rate range from 1.5% to 2%, with one forecast reaching 1.75%. Inflation risks are being reinforced by a weak yen, elevated crude oil costs and stronger wage growth, while Japan's core consumer prices rose 1.7% year-on-year in August, remaining below the BOJ's 2% target for an eighth consecutive month. The BOJ must balance containing inflation against weakening economic activity, particularly if the prolonged U.S.-Iran conflict drives oil prices higher or an oil shortage emerges. If fiscal stimulus under Prime Minister Sanae Takaichi fails to reassure markets about Japan's fiscal health, the yen could weaken further. Under a scenario in which inflation pressures ease around the middle of next year, the rate hike cycle could eventually end.