Japanese 10,000 yen notes (Captured from YTN)
The Bank of Japan raised its benchmark interest rate to 0.75%, the highest level in 30 years, breaking through the “0.5% barrier” for the first time since 1995 on Dec. 19. Analysts suggest that Japan, facing urgent needs to address yen depreciation and high inflation, has put an end to the “ultra-low interest rate era” maintained since the collapse of the bubble economy.
According to Kyodo News and other sources, the Bank of Japan decided to raise the benchmark short-term policy rate from the current 0.5% by 0.25 percentage points to 0.75% during a monetary policy meeting held over two days starting the previous day. This marks the resumption of rate hikes after an 11-month pause, following the January increase (0.25%→0.5%) that was halted due to considerations of U.S. tariff impacts. The Bank of Japan explained in a statement released on the same day, “We are adjusting interest rates to stabilize inflation, which is currently in the 2% range.”
Bank of Japan Governor Kazuo Ueda stated during a press conference, “We will continue to adjust the degree of monetary accommodation,” indicating that the rate-hiking stance will continue into next year. This clearly demonstrates the bank’s commitment to move away from the ultra-accommodative monetary policy that has entrenched inflation and yen weakness in the Japanese economy. Following news of the benchmark rate increase, Japan’s 10-year government bond yield rose to 2.020% during trading on the same day, reaching its highest level since August 1999 (2.040%). Financial markets projected that preference for Japanese government bonds could grow and pressure for unwinding yen carry trades utilizing yen weakness may gradually increase.
However, Governor Ueda mentioned regarding the neutral interest rate, which could indicate the extent of future rate increases, that it is “difficult to specify in advance,” suggesting an intention to raise rates while controlling the pace. With this dovish approach to rate increases, the yen-dollar exchange rate maintained around the 155 yen level during trading on the same day, continuing its weakness, while the Nikkei 225 index closed up 1.03% at 49,507.21 yen.
