The central bank increased its benchmark short-term policy rate by 0.25 percentage points, taking it to 0.75%, a level last recorded in September 1995. The move, which had been widely anticipated by markets, was absorbed calmly by investors and reflects the BOJ’s determination to rein in persistent inflation while carefully managing risks to economic growth.
BOJ Governor Kazuo Ueda said the decision was based on expectations that wage growth and price increases would continue at a moderate pace. Speaking to reporters, Ueda noted that while economic risks have diminished compared to previous years, the central bank remains cautious and closely watchful of future developments. The rate increase is expected to raise borrowing costs for mortgages and other loans, while offering higher returns on savings and deposits for households.
Japan’s inflation rate has remained above the BOJ’s long-standing target of around 2% for an extended period. In November, consumer prices rose 3% year-on-year when excluding volatile fresh food costs, underscoring the challenge facing policymakers. Although the new 0.75% rate is still low by international standards, it marks a clear departure from Japan’s prolonged era of near-zero or negative interest rates.
For years, the BOJ kept borrowing costs exceptionally low in an effort to revive demand and stimulate growth after the collapse of Japan’s asset price bubble in the early 1990s. Those policies also helped the government manage its enormous public debt, which is now nearly three times the size of the country’s economy. However, an aging and shrinking population, combined with weak investment, led to sluggish growth and entrenched deflationary pressures.
In 2013, the central bank launched an aggressive monetary easing program, often referred to as a “big bazooka,” which involved deep rate cuts and large-scale purchases of government bonds and other assets. By the time the COVID-19 pandemic struck, the benchmark rate had fallen to minus 0.1%. The BOJ only began lifting rates in 2024, marking its first hike in 17 years, after inflation appeared to stabilize above its target.
The latest increase comes despite signs of economic weakness. Japan’s economy contracted at an annualized rate of 2.3% in the most recent quarter. Nevertheless, improving business sentiment and sustained price pressures appear to have convinced policymakers that the conditions for higher rates are in place.
Japan’s move contrasts sharply with trends in many other major economies. Since the pandemic, central banks such as the U.S. Federal Reserve raised interest rates aggressively to combat surging inflation and have more recently begun cutting them to support slowing growth. Japan now stands out as it tightens policy while others ease.
The BOJ’s decision marks a pivotal moment in Japan’s economic trajectory, highlighting a cautious but clear shift away from extraordinary stimulus measures. As policymakers balance inflation control with fragile growth, the rate hike underscores the broader challenge of normalizing monetary policy in an economy shaped by decades of low inflation and demographic headwinds.
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