BOJ Rate Hikes: Nation Entering New Phase of Its ‘Economy with Positive Interest Rates’

Editorial

16:43 JST, December 20, 2025

The Bank of Japan has decided to raise its policy interest rate by 25 basis points to around 0.75%. This marks the highest level in about 30 years, since 1995.

The BOJ needs to advance the normalization of its monetary policy in response to prolonged rising prices and the weaker yen.

The BOJ raised rates in January this year, but then held off on further increases for six consecutive policymaking meetings to assess the impact of factors such as tariffs imposed by U.S. President Donald Trump.

The impact on corporate profits from high tariffs appears smaller than initially anticipated. It is expected that significant wage increases also will be realized in the 2026 shunto spring wage negotiations.

The BOJ likely judged that rate hikes would stabilize prices and lay the groundwork for economic growth.

Although the BOJ does not set exchange rate levels as direct policy targets, its monetary policy does indeed significantly influence exchange rates. The weaker yen fuels inflation, causing strong frustration among people and businesses. The central bank is urged to raise rates at an appropriate time also for the purpose of correcting excessive yen depreciation.

Financial markets have so far perceived Prime Minister Sanae Takaichi as being cautious about early rate hikes by inheriting the Abenomics economic policy and pursuing proactive fiscal policy while easing monetary policy. However, she appears to have accepted the rate hike this time due to concerns over rising prices.

The Japanese economy has been on a course of breaking away from its “lost 30 years.” The challenges have changed from deflation and a stronger yen to inflation and a weaker yen. The government and the BOJ must not choose the wrong remedy.

The future focus will be on how far interest rates will be raised. In monetary policy management, there is the notion of a “neutral rate” that neither stimulates nor slows economic growth. The BOJ has estimated this rate to be between 1% and 2.5%.

At a press conference, BOJ Gov. Kazuo Ueda hinted at considering additional rate hikes in line with economic and price conditions. With this historic rate hike, the nation’s “economy with positive interest rates” will move into a new phase.

Will this move strain the cash flow of small and midsize companies? Will the higher mortgage rates squeeze household budgets and undermine consumption? Shortly after the BOJ’s rate hike decision, the exchange rate moved toward a weaker yen at ¥157 per dollar. This is also a cause for concern.

It is important for the BOJ to carefully assess the impact of its policy shift and monitor risks. It is hoped that the central bank will fully explain the path of its future policy.

Furthermore, due to concerns over fiscal deterioration under the Takaichi administration, as well as speculation that the BOJ will continue rate hikes, the yield on the key long-term interest rate topped 2%, reaching its highest level in about 26 years. If interest payments surge, that will significantly constrain the nation’s fiscal policy.

It will also likely be crucial for the BOJ to seek close communication with the government.

 (From The Yomiuri Shimbun, Dec. 20, 2025)