The Bank of Japan raised its short-term policy rate by 25 basis points, lifting it to 0.75%, in a widely anticipated move that marks the highest level in roughly three decades and underscores the central bank’s gradual shift away from ultra-loose policy.
I’ll have more specific detail on the statement and associated BoJ releases soon, but for now I want to note the following.
The decision had been fully priced by markets following a steady drumbeat of firm inflation data and increasingly confident signals from policymakers. As a result, the immediate market reaction was muted, with attention quickly turning from the rate hike itself to the Bank’s forward guidance and Governor Kazuo Ueda’s assessment of the path ahead.
In its statement, the BoJ acknowledged that inflation has remained above its 2% target for an extended period, supported not only by imported cost pressures but also by firmer domestic price dynamics. At the same time, policymakers emphasised that real interest rates remain clearly negative, reinforcing the view that monetary conditions are still accommodative even after the hike.
Governor Ueda will likely strike struck a cautious tone in his press conference, stressing that future adjustments will depend on whether inflation proves sustainable and demand-driven. He’ll highlight the importance of wage developments, household consumption and corporate investment, while also noting the recent rise in Japanese government bond yields and the need to avoid destabilising financial conditions.
Markets continue to debate the timing of the next move. While some pricing points to another hike as early as mid-2026, others argue the bar for further tightening has risen, particularly given lingering uncertainty around global growth and the transmission of higher rates through Japan’s highly leveraged public sector.
From a market perspective, the lack of surprise reduced the risk of volatility seen during earlier policy shifts. Unlike past episodes that triggered sharp yen-funded carry unwinds, the currency’s reaction this time is likely to be driven more by guidance than by the rate increase itself.
Overall, the decision reinforces the BoJ’s message: policy normalisation is under way, but it will proceed slowly, cautiously and data-dependently, with no preset course for further tightening.
Bank of Japan Governor Ueda’s press conference begins at 0630 GMT / 0130 US Eastern time.
