Bank of Japan Hikes Interest Rates to Highest Level Since 1995

The Bank of Japan (BOJ) has raised its benchmark short-term interest rate by 0.25 percentage points to 0.75%, marking the highest level in nearly 30 years. The decision was approved unanimously by the policy board and was fully anticipated by economists and financial markets.

The move reflects the central bank’s growing confidence that Japan can achieve stable inflation and sustained economic growth after decades of ultra-loose monetary policy.

BOJ Policy Outlook

Governor Kazuo Ueda said the likelihood of realizing the BOJ’s baseline economic outlook has increased. The central bank noted that underlying inflation is rising at a moderate pace, supported by improving wage trends and firm domestic demand.

Despite the rate hike, the BOJ emphasized that real interest rates remain significantly negative. This indicates that monetary policy is still accommodative, even as the bank continues its gradual normalization.

Japan Economic Conditions

According to the BOJ, Japan’s economy is recovering moderately. Labour market conditions remain tight, while corporate profits are strong across many sectors.

The central bank expects wages and consumer prices to rise gradually, helping support household spending. However, overall economic growth is likely to remain moderate due to global uncertainties.

Future Rate Hike Signal

The BOJ reaffirmed that it will continue raising interest rates if economic activity and inflation move in line with its projections. The goal is to sustainably achieve the 2% inflation target, rather than tightening policy aggressively.

Policymakers stressed that future decisions will remain data-dependent and gradual.

Market Reaction

Financial markets reacted calmly to the announcement. Nikkei futures rose around 0.8%, reflecting confidence in Japan’s recovery. Meanwhile, the USD/JPY currency pair pared earlier gains after the decision.

BofA on BoJ: Slow, Gradual Path to Higher Rates

Bank of America says the Bank of Japan’s policy path remains unusual and hard to read, but the recent rate hike is unlikely to hurt wage growth or inflation. Once these trends are confirmed, the BoJ is expected to raise its policy rate further to 1.0%.

BofA’s base case assumes a semiannual pace of hikes, with the next increase in June 2026. Further gradual hikes are expected in January and July 2027, taking the policy rate to a terminal level of 1.5% by end-2027.

Conclusion

The BOJ’s latest rate hike marks a historic step away from decades of near-zero interest rates. While real rates remain negative, the central bank has clearly signaled that further policy normalization is possible if inflation and growth continue to improve.