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The Bank of Japan has raised short-term interest rates to their highest level in 30 years and kept the door open to further increases, as rising prices transform an economy that spent decades mired in deflation.
The BoJ said on Friday it was raising its policy rate by 0.25 percentage points to “around 0.75 per cent”.
The rate increase, a unanimous decision by the bank’s Policy Board, was the fourth under governor Kazuo Ueda, continuing a “normalisation” process he launched last year.
The rate rise was widely anticipated after what traders said was unusually clear messaging ahead of the decision. A less telegraphed rate increase in July 2024 caused severe market ructions.
Yields on 10-year JGBs climbed 0.035 percentage points to exceed 2 per cent for the first time since 2006, edging closer to their highest level since the 1990s. Bond yields move inversely to prices.
Anticipation of the BoJ’s move and investor concerns that Japan’s fiscal position will be stretched by Prime Minister Sanae Takaichi’s spending plans have driven JGB yields to multiyear highs in recent weeks.
The yen weakened 0.3 per cent against the dollar to ¥156.08 immediately following the BoJ’s announcement before strengthening to ¥155.85.
“There was some disappointment in the market that the BoJ’s statement was not more hawkish, but the central bank does seem to have handled this very smoothly this time,” said Shoki Omori, chief desk strategist at Mizuho. “I think that the risk, though, is that this [rate increase] will not significantly move the yen higher.”
The BoJ statement noted that labour conditions in Japan, where the population is shrinking, continued to be tight, while corporate profits were expected to remain strong despite the impact of tariff policies.
The central bank said companies were “highly likely” to keep raising wages next year and that prices would continue to rise moderately.
Those conditions justified the adjustment of monetary policy, it said, a move that some economists judged to be at odds with Takaichi’s sweeping economic stimulus plans.
The BoJ observed that “real interest rates are expected to remain significantly negative after the change in the policy interest rate, and accommodative financial conditions will continue to firmly support economic activity”.
It added that because real interest rates were low, if the economy performed in line with expectations, it would continue to raise the policy rate and adjust the degree of monetary accommodation.
Traders said markets would look for greater clarity on interest rate rises in 2026 during Ueda’s press conference later on Friday.
Headline consumer price inflation has been above the BoJ’s target level of 2 per cent for more than three years, driven by the yen’s relative weakness and Japan’s dependence on imports of food and energy.
Shortly before the BoJ’s decision was announced, official data showed consumer prices excluding fresh food rose 3 per cent in November from a year earlier.
Kei Fujimoto, senior economist at SuMi Trust, said: “The BoJ’s stance towards rate hikes reflects the fact that inflation is becoming entrenched. Factors such as the pass-through of import prices, raw material costs and labour expenses are contributing to sustained inflation.”
Additional reporting by William Sandlund and data visualisation by Haohsiang Ko in Hong Kong
