Bank of Japan Raises Interest Rate to Highest Level Since 1995

The Bank of Japan has raised its short-term benchmark interest rate by 25 basis points to 0.75% during its December meeting, reaching the highest level since September 1995. This decision was unanimous and aligned with market expectations.

This marks the second interest rate hike in 2025, following a similar increase in January, confirming the central bank's gradual shift away from the ultra-loose monetary policy that has persisted for decades.

Wage and Profit Support Drives Change

The Bank of Japan indicated that it expects companies to continue providing stable wage increases through 2026, supported by improved corporate profits. This is a key factor in sustaining inflation and stimulating domestic demand.

Despite the interest rate hike, policymakers emphasized that real interest rates remain significantly negative and that financial conditions continue to support economic activity, suggesting that the tightening path will remain gradual and cautious.

Future Path Dependent on Data

The bank affirmed that it will continue to raise borrowing costs if the economic expectations outlined in the October report are realized, adopting an approach based on economic data and inflation developments.

Regarding prices, the Bank of Japan forecasts that core inflation will fall below the 2% target during the first half of the fiscal year 2026, before gradually rising again later, reflecting a delicate balance between supporting growth and controlling inflationary pressures.

This decision strengthens the Bank of Japan's position among major central banks that have begun normalizing their monetary policies, with global markets closely monitoring its impact on the Japanese yen and bond and stock markets.