（Singapore, 19.12.2025）The Bank of Japan (BOJ) has raised its benchmark interest rate to the highest level in three decades, marking another major step away from the ultra-loose monetary policy that defined the country’s economy for years. The move reflects growing confidence among policymakers that Japan can finally sustain stable inflation supported by rising wages.
On Friday, the BOJ increased its short-term policy rate by 25 basis points to 0.75%, a level last seen in 1995, when Japan was grappling with the fallout from the collapse of its asset bubble. The decision was made unanimously by the policy board and was widely expected by markets.
In its statement, the central bank made clear that this was not a one-off move. It said it would continue raising interest rates if the economy and prices evolve as projected, reinforcing expectations that Japan has entered a gradual but steady rate-hiking cycle.
“Judging from recent data and surveys, there is a high chance the mechanism in which wages and inflation rise moderately in tandem will be sustained,” the BOJ said, adding that real interest rates remain “significantly low.”
Inflation Momentum Strengthens
The rate hike comes as inflation in Japan remains firmly above the BOJ’s long-standing 2% target. Data released earlier on Friday showed that core consumer prices rose 3% in November, marking the 44th consecutive month in which inflation has met or exceeded the central bank’s goal.
For years, Japan struggled with deflation and weak consumer demand following the burst of its property bubble in the early 1990s. But that trend has now clearly reversed. Rising food costs, stronger corporate profits, and improving wage growth have helped entrench price gains across the economy.
Labour unions are also preparing for annual wage negotiations with targets similar to last year’s talks, which resulted in the strongest pay increases in decades. This has reassured policymakers that wage momentum is not fading, an essential condition for sustainable inflation.
“This rate hike was long overdue,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “The BOJ’s message remains consistent if economic and price conditions develop as expected, further hikes are likely.”
Markets React Calmly
Financial markets showed a muted response to the decision, suggesting that investors had already priced in the move.
The Japanese yen weakened slightly after the announcement, slipping to around 156 per US dollar, a sign that the hike did little to reverse long-standing currency pressures. The yen remains far weaker than its 20-year average, reflecting Japan’s still-low interest rates compared with overseas peers.
Meanwhile, Japanese government bond yields climbed, with the benchmark 10-year yield touching 2% for the first time since 2006. The Nikkei 225 stock index largely held onto earlier gains, indicating that equity investors remain comfortable with the pace of tightening.
The gap between Japanese and US interest rates has narrowed by about 125 basis points this year, but analysts note that this has not been enough to significantly strengthen the yen.
Governor Kazuo Ueda, who took office in 2023, has been steadily dismantling the BOJ’s massive stimulus framework, ending yield curve control last year and lifting rates several times since. Friday’s decision was notable as it marked the first unanimous rate hike under his leadership, projecting a united stance after recent internal disagreements.
Still, challenges remain. While the BOJ reaffirmed its view that underlying inflation will converge around 2% through fiscal 2027, some board members expressed differing opinions on the timing. One argued that the target has already been achieved, while another said it could be reached sooner than projected.
Ueda is expected to tread carefully in communicating the next steps. Japan’s economy, while resilient, remains sensitive to higher borrowing costs, and policymakers are keen to avoid tightening too aggressively.
Japan now stands out globally as the only major central bank still raising interest rates this year. In contrast, the US Federal Reserve has already cut rates several times as inflation there cools.
Even after Friday’s hike, Japan’s interest rates remain below inflation, meaning monetary policy is still accommodative. However, analysts believe rates could eventually rise toward the BOJ’s estimated neutral range of 1% to 2.5% if current trends persist.
Former BOJ executive Kazuo Momma expects further increases at a measured pace, possibly once every six months. That could see rates climb to around 1.5% by 2027, depending on economic conditions.
The hike also reflects political realities. Although Prime Minister Sanae Takaichi is seen as favoring easier monetary policy, persistent inflation and a weak yen have increased the cost of imports, putting pressure on households. These factors made it difficult for the government to oppose further tightening.
At the same time, Japan’s economy has shown resilience despite higher US tariffs and global uncertainty. Business confidence has improved, and corporate surveys point to continued wage growth next year.
Governor Ueda will outline the BOJ’s thinking and future outlook at a press conference later on Friday. Investors and economists will be watching closely for any clues on how fast and how far interest rates could rise from here.
