Bank of Japan Raises Interest Rate to 0.75%, Highest in Three Decades

Historic Rate Hike Signals Policy Shift

The Bank of Japan (BoJ) announced on Friday, December 19, 2025, a significant increase in its benchmark interest rate, raising it by 25 basis points to 0.75 percent. This move, decided unanimously by the nine-member policy board after a two-day monetary policy meeting, places the rate at its highest level since September 1995, marking a pivotal moment in the nation's economic policy after decades of ultra-loose monetary settings.

The hike from the previous 0.50 percent rate is the second such increase this year, following an earlier adjustment in January. It underscores the central bank's growing confidence in Japan's economic recovery and its ability to achieve its 2 percent inflation target sustainably.

Economic Rationale and Inflationary Pressures

The BoJ cited several factors for its decision, primarily the expectation of continued steady wage increases in 2026 and improving corporate profits. The central bank noted that the likelihood of underlying inflation aligning with its 2 percent target has been rising. Despite the hike, the BoJ indicated that real interest rates remain 'significantly negative', suggesting that accommodative financial conditions will persist to support economic activity.

Inflationary pressures have been a key driver, with Japan's core consumer price index (CPI) remaining above the 2 percent target for 44 consecutive months. In November, the core CPI stood at 3.0 percent, well exceeding the central bank's objective. The weakening of the Japanese yen has also contributed to higher import costs, further fueling inflation.

Governor Ueda's Outlook and Market Reactions

BoJ Governor Kazuo Ueda affirmed that the central bank would continue to raise the policy rate if economic and price developments align with its forecasts. He emphasized that the pace of future adjustments would depend on evolving economic, price, and financial conditions. Governor Ueda also stated that the current 0.75 percent rate is still 'far from the bottom' of the estimated neutral range, indicating potential for further tightening.

Following the announcement, financial markets reacted with a slight weakening of the yen against the U.S. dollar, trading around 156.02 per dollar. The yield on the benchmark 10-year Japanese government bond (JGB) rose to 2.02 percent, its highest level since August 1999. Conversely, the Nikkei 225 stock index saw an increase of 1.28 percent.

End of an Era: Decades of Ultra-Loose Policy

This rate hike marks another step in the BoJ's gradual exit from its prolonged period of unconventional monetary policy. For decades, Japan grappled with deflation and economic stagnation, often referred to as the 'lost decades'. The central bank had previously implemented a zero-interest rate policy in the 2000s and even a negative interest rate policy in the mid-2010s to stimulate the economy. The shift began with the termination of the negative interest rate policy in March 2024, followed by the first rate hike in January of this year. The current trajectory suggests a sustained effort to normalize monetary conditions as the economy shows signs of a moderate recovery.