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Japan’s Central Bank Raises Rates to 30-Year High, Signals Confidence in Economic Recovery

Prime Highlights

  • The Bank of Japan raised its benchmark interest rate to a 30-year high, marking a key step in moving away from ultra-loose monetary policy.
  • Officials remain confident about the business outlook, expecting strong corporate profits and continued wage growth in the coming years.

Key Facts

  • The BOJ increased its short-term policy rate by 25 basis points to 0.75%, the highest level since 1995.
  • Yields on 10-year Japanese government bonds rose above 2% for the first time since 1999 following the decision.

Background:

The Bank of Japan raised its key interest rate on Friday to the highest level in 30 years, continuing its slow move away from ultra-low interest rate policies.

The central bank increased the short-term rate by 25 basis points to 0.75%, a level last seen in 1995. The move was expected by markets and led to selling in government bonds, pushing long-term yields higher.

After the decision, the yield on 10-year Japanese government bonds crossed 2% for the first time since 1999, while yields on 20-year bonds also rose. The move reflects growing investor expectations that Japan’s era of near-zero interest rates is nearing its end.

Despite raising rates, the BOJ stressed that financial conditions would remain supportive. The central bank said real interest rates are still expected to stay “significantly negative,” ensuring that borrowing conditions continue to support economic activity.

The BOJ acknowledged signs of weakness in the broader economy, noting that recent data showed Japan’s economy contracted more than previously estimated in the third quarter. However, officials remained positive about businesses, saying company profits are expected to stay strong and firms are likely to keep raising wages in 2026.

The central bank also reaffirmed its view that Japan is making progress toward achieving a sustainable cycle of rising wages and prices. Inflation has remained above the BOJ’s 2% target for more than three years, although officials expect price growth to moderate in 2026 as food inflation slows and government measures take effect.

Market reaction to the rate hike was mixed. The yen weakened modestly against the US dollar, while Japan’s benchmark Nikkei 225 index gained more than 1%, suggesting investor confidence in the country’s economic transition.

BOJ Governor Kazuo Ueda said future rate increases would be gradual and data-dependent, adding that estimating Japan’s neutral interest rate remains challenging. Economists expect the policy rate to rise further over time, potentially reaching around 1% by mid-2026.

The latest decision comes amid rising government bond yields and concerns over Japan’s high public debt, but analysts say the move signals growing confidence that the economy can withstand a slow return to more normal monetary conditions.