Bank of Japan raises short-term interest rates to highest in 30 years

Japan’s central bank on Friday raised short-term interest rates to a three-decade high, moving toward policy normalization as inflation has remained above target levels for nearly four years.

The Bank of Japan increased benchmark interest rates by 25 basis points to 0.75%, the highest level since 1995, in line with the expectations of economists surveyed by Reuters.

Real interest rates are expected to remain “significantly negative,” the BOJ said, adding that accommodative financial conditions will continue to solidly support economic activity.

Following the decision, the yield on 10-year Japanese government bonds exceeded the 2% limit for the first time since 2006, while the yen lost 0.20% of its value against the dollar, falling to 155.79. The benchmark Nikkei 225 stock index gained 1.21%.

Japan embarked on policy normalization last year, abandoning the world’s only negative interest rate regime since 2016. Since then, the BOJ has consistently maintained its stance on gradually raising interest rates, stating that its aim is to see a “virtuous cycle” in which wages and prices rise.

While inflation has remained above the BOJ’s 2% target for 44 months, data released earlier in the day showed that consumer prices increased by 2.9% in November. High inflation puts real wages under pressure We have been in decline for 10 months According to the data of the Ministry of Labor.

The BOJ has predicted that core inflation, which excludes fresh food prices, will likely fall below 2% from April to September 2026 due to a slower rise in food prices as well as the effects of government measures to address rising prices.

Higher interest rates risk worsening the downturn in the Japanese economy. Revised GDP figures It showed that the economy shrank more than initially estimated in the third quarter, contracting by 0.6% on a quarterly basis and 2.3% on an annual basis.

In its statement, the BOJ said that although there is weakness in the economy, corporate profits will remain high and companies are expected to continue increasing wages in 2026.

“It is highly likely that the mechanism in which wages and prices increase moderately will continue,” the bank said, adding that the possibility of reaching the 2% target of inflation has increased.

The rate hike also comes at a time when JGB yields have reached their highest levels in a decade, rising further following the decision, increasing the risk of higher borrowing costs for Japan and increasing financial distress.

Asia’s second-largest economy currently has the world’s highest debt-to-GDP ratio at almost 230%, according to International Monetary Fund data.

However, rising yields could support the Japanese currency. The yen has been trading around 154-157 against the dollar since November and has lost more than 2.5 percent since Prime Minister Sanae Takaichi, an advocate of looser monetary policy, took office in October.

After this increase, the BOJ will likely raise the policy rate to a final interest rate of 1% in mid-2026, Shigeto Nagai, head of Japan Economics at Oxford Economics, told CNBC before the BOJ decision. Terminal or neutral rate refers to the rate that balances inflation and economic growth; It neither overheats nor slows down the economy.

BOJ Governor Kazuo Ueda It is said that The final interest rate was difficult to predict as the central bank earlier this month pegged it at between 1% and 2.5%.

Nagai warned that a rate hike by the BOJ could cause friction with Takaichi if inflation falls smoothly to 2% in the first half of 2026.

Takaichi strongly opposed the BOJ’s rate hikes during the leadership race but has since softened his stance.

Nagai said the reason Takaichi agreed to this rate hike was the yen’s weakness and that “addressing the cost of living crisis has become an urgent policy issue.”

Japan cabinet in November Approved the incentive package The total was 21.3 trillion yen ($135.5 billion), as Takaichi sought to shore up the country’s slowing economy and offer support to consumers hit by inflation.