The Bank of Japan raised its benchmark interest rate to the highest in 30 years and said more increases are in the pipeline if conditions allow, in a sign of growing conviction that it can attain the stable inflation target it has pursued for more than a decade.
Governor Kazuo Ueda’s policy board increased the rate by a quarter percentage point to 0.75%, in a unanimous decision, according to its statement Friday. The central bank cited the rising likelihood of its economic outlook being realized. The rate change was expected by all 50 economists surveyed by Bloomberg.
The BOJ made it clear that the hiking cycle will continue by asserting that it intends to keep raising borrowing costs if its economic outlook is realized. It also said that underlying inflation is continuing to rise moderately.
“I believe this rate hike was long overdue,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “Looking at the statement, the BOJ’s stance remains unchanged in that if economic and price conditions develop as projected, it will continue raising rates. This means further hikes are likely ahead.”
The yen weakened to as far as 156.16 against the dollar after the release of the statement, suggesting the rate hike was fully priced into markets.
Japanese government bond yields rose after the decision, with the yield on the benchmark 10-year bond climbing to 2% for the first time since 2006. The Nikkei 225 Stock Average largely held its earlier gain.
The policy change underscored Ueda’s determination to keep raising rates as inflation gradually embeds itself into the economy in a major shift after the 1990 burst of a real estate bubble led to decades of weak prices. Earlier Friday, data showed that a key gauge of consumer prices rose 3% in November, extending the streak of months at or above the BOJ’s 2% inflation target to 44.
“My view is about the same as the average view of the market. Probably I think the BOJ will continue raising rates at a pace of around once every six months or so,” Kazuo Momma, a former BOJ executive director, said on Bloomberg TV shortly after the decision. “Maybe two rate hikes in 2026 and one more in 2027, reaching the level of 1.5%.”
While the emergence of monetary easing advocate Sanae Takaichi as prime minister in October raised doubts about Ueda’s leeway to keep normalizing policy, the political costs of continued inflationary pressure and yen weakness helped ensure that the government didn’t discourage the move.
Ueda raised borrowing costs for the first time since January following economic data signaling that President Donald Trump’s tariffs aren’t delivering a major blow to the economy. Also, various labor unions have set targets ahead of annual wage talks similar to what they set a year ago, when the process resulted in historic gains in pay, indicating that wage momentum is intact.
The market’s focus is now on the timing for future hikes, with most BOJ watchers anticipating the pace will be once every six months.
The action underscores the BOJ’s outlier status among its global peers as the only central bank raising rates this year. Last week the Federal Reserve cut its rate for a third time this year. Even after Friday’s hike, Japan’s interest rate remains well below its inflation level, while US borrowing costs are higher than price growth there. The movements show that the two rates are converging.
The rate gap with the US has now shrunk by 125 basis points this year. The narrowing of the gap hasn’t reversed trends in the currency market, with yen weakness broadly persisting. The current level around 156 to the dollar compares with its 20-year average of 111.61.
This was the first unanimous rate hike decision under Ueda, projecting a united front after two of the nine board members voted against keeping the rate unchanged at the last two gatherings. Still, two board members objected to the board’s description of the outlook for prices.
Ueda will elaborate on his thinking behind Friday’s policy decision and the future rate trajectory at a press briefing starting at 3:30 p.m.
“At the governor’s press conference, the key focus will be what Ueda says about the neutral interest rate,” Taguchi said. “However, since the neutral rate isn’t something that can be pinpointed precisely, he is unlikely to make definitive statements.”