Bank of Japan Delivers 25 bps Rate Hike to 0.75%, Highest Level in 30 Years Amid Persistent Inflation

Japan’s central bank has lifted its key Bank of Japan interest rate to the highest level since 1995, stepping further away from years of ultra-loose policy as inflation stays stubbornly above target. The Bank of Japan raised the benchmark by 25 basis points to 0.75%, matching a Reuters poll of economists, yet warned that real borrowing costs remain "significantly negative."

The latest move comes while consumer prices in Japan have exceeded the Bank of Japan’s 2% target for 44 straight months, with November inflation at 2.9%. That persistent price rise has squeezed households, as real wages have dropped for 10 consecutive months, based on data from Japan’s labour ministry released earlier on the same day.

Bank of Japan interest rate move and weak yen politics

The decision also lands amid pressure from currency markets and politics. The yen has traded between 154 and 157 per dollar since November, weakening more than 2.5% since Prime Minister Sanae Takaichi, who had favoured looser policy, entered office in October. Analysts say the soft currency has sharpened public concern over rising import and living costs.

Shigeto Nagai, head of Japan Economics at Oxford Economics, told CNBC before the decision that Takaichi’s stance likely shaped the timing. Nagai said Takaichi would accept this Bank of Japan interest rate rise partly because of the yen’s slide and because "addressing the cost-of-living crisis has become an urgent policy issue."

Bank of Japan interest rate normalisation and wage-price goals

Japan started normalising policy in 2024 when the Bank of Japan ended the negative interest rate regime that had been in place since 2016. Since that landmark shift, officials have stressed that they would move Bank of Japan interest rate settings up only gradually, aiming to secure a "virtuous cycle" in which stronger wages support stable price growth.

The central bank said it was "highly likely" that companies will keep lifting pay steadily again in 2026, after robust wage settlements in 2025. It added that "underlying inflation had continued to rise moderately," helped by firms passing higher labour costs into selling prices, suggesting policymakers see limited risk of an immediate slide back towards deflation.

Bank of Japan interest rate outlook and terminal level debate

Nagai expects the Bank of Japan to deliver another rise in its policy rate around mid‑2026, taking the Bank of Japan interest rate to a terminal level of 1%. The terminal, or neutral, rate is described as the point where inflation and growth stay balanced, so it neither overheats activity nor slows the economy unnecessarily.

However, Nagai also warned that a further hike could cause friction with Takaichi if inflation drifts down smoothly towards 2% during the first half of 2026. During the leadership contest, Takaichi had strongly opposed Bank of Japan interest rate increases but has since moderated those comments, as price pressures and currency weakness dominated domestic debate.

Bank of Japan interest rate policy amid slowing Japan economy

The rate increase comes as growth momentum in Asia’s second-largest economy looks fragile. Revised figures show Japan’s economy shrank more than first estimated in the third quarter, with GDP falling 0.6% from the previous quarter and 2.3% on an annualised basis, raising fears that steeper Bank of Japan interest rate settings could deepen the slowdown.

Higher policy rates are also feeding through to government borrowing costs. Yields on Japanese government bonds have climbed to multi‑decade highs in recent months, increasing the risk of larger interest bills for the state. Japan already has the world’s highest debt-to-GDP ratio, at almost 230% according to International Monetary Fund data.

To offset some of this drag on the Japan economy, the cabinet in November approved a stimulus package worth 21.3 trillion yen, or about $135.5 billion. The plan aims to support growth and ease pressure on inflation‑hit households, working alongside the Bank of Japan interest rate strategy rather than replacing tighter monetary settings.

BOJ Governor Kazuo Ueda has said recently that judging the eventual terminal level remains difficult, with the central bank estimating it somewhere between 1% and 2.5%. For now, the Bank of Japan interest rate rise to 0.75% signals cautious confidence that wage gains and moderate inflation can continue, even as growth slows and fiscal strains mount.