Bank of Japan Considered U.S. Tariffs, Coming Shunto Wage Hike Talks in Its Decision to Raise Interest Rates

By Tomoki Okamoto / Yomiuri Shimbun Staff Writer

17:24 JST, December 20, 2025

The Bank of Japan decided to raise its policy interest rate to around 0.75% at its latest monetary policy meeting in light of its outlook for dealing with concerns about the impact of high U.S. tariffs and the likely trend of the next shunto spring wage negotiations.

The BOJ had continued to closely monitor developments in those areas since its meeting in January this year, in which it decided to lift the rate to around 0.50%.

Now, the focus will be shifted to possible interest rate hikes next year and later, but there is an air of uncertainty about the prospects of the economy.

Regarding the reason for the rate hike, BOJ Gov. Kazuo Ueda explained at a press conference after the meeting on Friday, “It is highly likely that the mechanism by which both wages and prices rise moderately will be maintained.”

The BOJ raised the rate to around 0.50% at its meeting in January this year. Since then, it took time to discern the impact of the high tariff measures of the administration of U.S. President Donald Trump on the U.S. economy and on Japanese companies, as the central bank considered that there was “high uncertainty.”

This is because, if corporate performance were to deteriorate due to the impact of the high tariffs, it would be difficult to achieve wage increases in the next shunto wage negotiations.

However, a view is spreading that the impact of the tariffs on Japanese companies will be limited.

Ueda said at the press conference, “Corporate earnings are expected to remain at high levels on the whole, even after taking into account the impact of tariff measures.”

As for the shunto negotiations next spring, Ueda stated, “There is a high possibility that steady wage increases will be implemented in the same manner as this year.”

Prime Minister Sanae Takaichi’s administration, which was launched in October and seeks aggressive fiscal spending and monetary easing policy, appeared to be an obstacle to the BOJ’s rate hikes.

When Takaichi became the president of the ruling Liberal Democratic Party, she said that the government would take responsibility for financial policies. Although there was a view that the BOJ’s rate hikes would meet negative reactions from the government, Takaichi recently was inclined to respect the BOJ’s decision. A senior member of the Prime Minister’s Office said that she “has a common awareness with the BOJ in terms of fundamentals.”

The rate hike this time was announced immediately after the supplementary budget proposal for fiscal 2025, the largest since the COVID-19 pandemic, was approved on Tuesday. Some around the prime minister complained, saying that the rate hike could be a problem while the government is starting a growth-oriented economic policy.

Accelerating weak yen

Due to the rate hike to around 0.75% this time, the BOJ’s policy interest rate will break the “0.5% barrier” for the first time in 30 years, since 1995.

The central bank previously indicated estimates of around 1.0% to 2.5% for neutral interest rates, meaning rates that neither stimulate nor cool the economy.

Ueda expressed his intention to continue to raise BOJ’s policy interest rates, saying, “It is difficult to properly determine the neutral interest rates, but there still is a little distance to the lower limit of the estimates.”

Deciding on higher interest rates normally leads to a stronger yen in foreign exchange markets. However, a view spread after the press conference that Ueda was negative on future rate hikes because he did not set a clear path for them. This led to an unusual result: The yen weakened further immediately after the rate hike decision.

The yen weakened to ¥156.73-75 against the dollar on Friday in Tokyo, and weakened to the ¥157.70 range during the day in New York.

The excessively weak yen could push up import prices, accelerating price increases.

According to Ueda, plural members of the monetary policy committee indicated their view at the meeting that it is necessary to closely monitor the impact of the weak yen on prices.

Japan’s consumer price index rose 3.0% in November from a year earlier, according to data released by the Internal Affairs and Communications Ministry on Friday, staying above the central bank’s 2% target for the 44th straight month.

Concerning additional rate hikes, Tsuyoshi Ueno of NLI Research Institute said: “If the rate hike ends this time, the weak yen will continue. The administration may have no choice but to approve moderate rate hikes.”