Bank Of Japan Takes Landmark Step: Policy Rate Raised To 0.75%

In a widely anticipated move, the Bank of Japan (BOJ) announced on Friday its decision to raise the short-term policy interest rate to 'around 0.75%' from its previous level of ‘around 0.5%’, the highest level since September 1995. 

The decision, reached by a unanimous vote at the December 2025 Monetary Policy Meeting (MPM), marks the highest borrowing costs for the nation in three decades. 

Unanimous Decision Signals Shift from Decades of Monetary Support

The central bank's landmark step effectively ends a prolonged era of near-zero borrowing costs and massive monetary intervention. According to the BOJ’s official statement, "the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation" if the economic outlook remains on track.

Despite the hike, the BOJ emphasised that financial conditions remain supportive. "Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity," the Bank stated.

Rising Confidence in the 2% Price Stability Target

A key driver for this tightening is the increasing certainty surrounding Japan's inflation trajectory. The BOJ noted that "the likelihood of realising the baseline scenario that underlying CPI inflation will be at a level that is generally consistent with the price stability target of 2 percent in the second half of the projection period of the October 2025 Outlook Report has been rising".

Currently, underlying CPI inflation continues to rise moderately as firms increasingly pass on wage increases to selling prices.

Steady Wage Growth Underpins Policy Shift

The Bank maintains a positive outlook on the labor market, asserting that "it is highly likely that the mechanism in which both wages and prices rise moderately will be maintained".

The BOJ’s assessment indicates a low risk of interruption to active wage-setting behavior by firms. "It is highly likely that firms will continue to raise wages steadily next year, following the solid wage increases this year," the official statement read.

Global Economic Outlook and Trade Policy Impact

Regarding international risks, the Bank observed a shift in the global landscape. While noting the impact of trade policies, the BOJ stated that for the U.S. economy and trade policies, "while uncertainties remain, they have declined".

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