BoJ Raises Interest Rates for the First Time in 30 Years: What’s Next?

The Bank of Japan raises its key interest rate to the highest level in 30 years, signaling clearly that the tightening cycle will continue if economic conditions allow. This reflects growing confidence that the country will achieve its long-pursued inflation target.

Following the decision of the Board of Governors, led by Kazuo Ueda, the rate was increased by 25 basis points to 0.75%. The decision was unanimous and fully in line with market expectations. The central bank noted that the likelihood of its economic forecast being realized is rising, while core inflation continues to accelerate moderately.

Ueda stated that the Bank will make decisions at each upcoming meeting based on economic and price developments, with the pace of future rate hikes depending on these factors. According to him, the current interest rate level still remains below the lower bound of the so-called neutral rate, which the central bank estimates to be between 1% and 2.5%.

Markets reacted with a weaker yen, which rose above 156.80 against the US dollar, suggesting that investors had expected even clearer signals of future hikes. Yields on Japanese government bonds increased, with 10-year bonds surpassing 2%—the highest level since 1999. Meanwhile, the Nikkei 225 index closed up about 1%.

Recent data show that consumer prices in Japan rose 3% in November, marking the 44th consecutive month of inflation at or above the 2% target. This strengthens the case for continued normalization of monetary policy after decades of ultra-low prices and stimulus.

Most analysts expect the Bank of Japan to continue raising rates roughly once every six months. According to market consensus, two more hikes are possible in 2026 and one in 2027, which would bring the key rate to around 1.5%.

Japan remains an outlier among major central banks worldwide, being the only one currently raising rates while the US Federal Reserve is already moving toward cuts. Nevertheless, the interest rate gap between Japan and the US is gradually narrowing, although the yen’s weakness persists.

Investors’ focus will now be on the Bank’s next moves and its communication with the government, especially against the backdrop of political sensitivity to inflation and the weakening of the national currency.

– Source: Bloomberg Terminal