Bank of Japan Raises Rates to 30-Year High

Photo: Wikipedia

The Bank of Japan lifted its benchmark interest rate to the highest level in three decades, marking a decisive break from years of ultra-loose monetary policy. While the move confirmed Japan’s shift toward normalization, the yen weakened as investors had hoped for stronger guidance on the pace of future tightening.

Rate reaches highest level since 1995

The BOJ’s policy board unanimously raised the benchmark rate by 25 basis points to 0.75%, a decision fully anticipated by economists surveyed by Bloomberg. Policymakers cited a rising likelihood that their economic outlook will be realized, pointing to solid wage growth momentum and easing risks from US trade tariffs.

The central bank also said underlying inflation continues to rise moderately, reinforcing the case for further tightening.

Clear signal that hikes will continue

In its statement, the BOJ made clear that the rate-hiking cycle is not over. Officials said borrowing costs will continue to rise if economic conditions evolve as expected. Governor Kazuo Ueda stressed that policy decisions will be made meeting by meeting, depending on developments in growth and prices.

Ueda again highlighted the difficulty of pinning down the neutral rate, estimating it lies somewhere between 1% and 2.5%. Even after the latest move, the policy rate remains below the lower end of that range.

Yen weakens despite rate increase

The yen slid past 157 per dollar after Ueda’s press conference, reversing earlier gains. The currency had been trading closer to 155.80 before the decision. Market participants interpreted the central bank’s messaging as less hawkish than anticipated.

Investors had been looking for clearer signals on how aggressively the BOJ intends to tighten policy, and the absence of firm guidance weighed on the currency.

Bond yields climb as markets adjust

Japanese government bond yields rose following the decision, with the benchmark 10-year yield climbing above 2% for the first time since 1999. Equity markets were less volatile, with the Nikkei 225 having already closed about 1% higher earlier in the day.

The rise in yields reflects a reassessment of long-term inflation expectations after decades of deflationary pressure.

Inflation and wages reshape Japan’s economy

The policy shift underscores a profound change in Japan’s economic landscape, as inflation becomes more entrenched. A key consumer price measure rose 3% in November, extending the run of inflation at or above the BOJ’s 2% target to 44 months.

Strong wage momentum, supported by labor union demands similar to last year’s historic increases, has further strengthened the case for normalization.

Japan stands apart from global peers

The BOJ is now the only major central bank raising rates in 2025. While the Federal Reserve and others have moved toward easing, Japan is heading in the opposite direction. Even so, Japan’s interest rate remains below inflation, highlighting how far the country still is from restrictive territory.

As International Investment experts report, the BOJ’s rate hike confirms Japan’s exit from its long era of zero interest rates. However, future tightening will likely be calibrated carefully, with currency weakness and political considerations playing a crucial role in shaping the pace of further increases.