Bank of Japan likely to hike policy rate by 25 bps — to a level not seen since 1995

The Bank of Japan (BoJ) is poised to deliver its most consequential policy shift in nearly three decades, with markets widely expecting a 25-basis-point rate hike at the central bank’s December 18–19 meeting.

If implemented, the move would lift the policy rate from 0.5% to around 0.75 per cent, a level Japan has not seen since 1995, marking a decisive departure from the ultra-loose monetary regime that has defined the country’s economic trajectory for much of the past generation.

The anticipated decision would also represent the BoJ’s first rate hike since January 2025, underscoring a renewed determination by Governor Kazuo Ueda to normalise policy after years of aggressive easing, yield-curve control, and negative interest rates.

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According to reporting by Nikkei Asia, the 25-bps increment has emerged as the leading option as policymakers grow more confident that inflationary forces are durable rather than transitory.

A historic shift after decades of exceptional policy

Japan has been the last major economy to unwind ultra-easy monetary settings, even as global peers raised interest rates aggressively in response to post-pandemic inflation. For years, the BoJ resisted tightening due to weak wage growth, subdued consumption, and fears of derailing a fragile recovery.

But the environment has shifted significantly over the past year. Inflation has remained above the BoJ’s 2% target for an extended period; corporate wage negotiations have produced the strongest pay increases in decades; and broader economic indicators suggest that Japan may finally be exiting its deflation-scarred era.

A move to 0.75% would still leave Japan with one of the lowest policy rates among advanced economies, but symbolically it marks the end of an era in which the country embraced the world’s most unconventional monetary tools, including negative rates and massive government bond purchases.

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Why now? Inflation and wages are finally aligning

Economists say the BoJ’s confidence has grown as the alignment between inflation and wage growth becomes clearer. A sustainable cycle where rising wages support consumption and in turn anchor stable inflation has long been the central bank’s missing ingredient.

Nikkei reports that policymakers believe this virtuous cycle is slowly taking hold. Corporate earnings have been robust, labour shortages are intensifying, and government-backed wage agreements have strengthened household incomes. These factors reduce the risk of tightening prematurely.

Another driver of the BoJ’s shift is the weakening yen, which has fallen sharply this year amid widening rate gaps with the US Federal Reserve and the European Central Bank. Although the central bank insists it does not target exchange rates, a stronger yen would help ease import-driven inflation and support consumer purchasing power.

Markets brace for ripple effects

Global markets are watching closely, given Japan’s long-standing role as a supplier of cheap capital. Even modest rate increases could trigger a partial unwinding of the “carry trade”, in which investors borrow in low-yielding yen to invest in higher-return assets elsewhere. A shift by the BoJ could therefore influence global bond markets, equity flows, and currency dynamics.

Domestically, a higher policy rate is expected to bring gradual tightening in lending conditions, though analysts anticipate that the central bank will avoid aggressive moves to prevent destabilising the still-recovering economy.

What comes next? Cautious steps toward normalisation

While expectations are high for a December hike, economists emphasise that the BoJ’s path beyond that point remains uncertain. Governor Ueda has consistently signalled a cautious, data-driven approach, suggesting that further tightening will depend on sustained wage momentum and signs of resilient domestic demand.

Most forecasts still expect Japan’s monetary normalisation to proceed slowly, with rates remaining far below historical norms for the foreseeable future.

Nevertheless, a move to 0.75% would be a landmark moment: a symbolic and practical step away from nearly 30 years of extraordinary monetary accommodation. For the first time since the mid-1990s, Japan appears ready to re-join the global mainstream of monetary policymaking, albeit on its own cautious terms.

With inputs from agencies