BOJ Raises Rates to 30-Year High in December Policy Shift
- Remin Francis I R
- Dec 22, 2025
- 2 min read
The Bank of Japan (BOJ) concluded its December 2025 Monetary Policy Meeting with a move that marks a definitive turning point in the nation’s long economic journey. In a unanimous decision, Governor Kazuo Ueda and his policy board raised the short-term interest rate to 0.75%, up from the previous 0.5%.
This isn't just an incremental adjustment; it represents the highest interest rate level Japan has seen since 1995. While central banks across the West are beginning to ease their monetary policy, Japan is moving in the opposite direction, signalling a newfound confidence in its domestic economic cycle.
The primary driver behind this hike is the increasing realisation of a "virtuous cycle" between wages and prices, a goal the BOJ has chased for decades. According to the Bank’s latest statement, it is "highly likely" that the mechanism where both wages and prices rise moderately will be maintained.
Key indicators supporting this move include:
Steady Wage Growth: Following solid increases in 2025, firms are expected to continue raising wages steadily into next year. The BOJ noted that the risk of this "active wage-setting behaviour" being interrupted is currently low.
Price Pass-Through: Underlying CPI inflation continues to rise moderately as businesses successfully pass on increased labour costs to selling prices.
Confidence in the 2% Target: The BOJ reported that the likelihood of reaching its 2% price stability target, specifically within the window projected in the October 2025 Outlook Report, has been steadily rising.
Perhaps the most striking aspect of the BOJ’s 2025 trajectory is how much it contrasts with its global peers. While the Federal Reserve (FRB), the European Central Bank (ECB), and the Bank of England (BOE) have spent the year cutting rates, the BOJ has delivered a total of 50 basis points in hikes.
The BOJ has left the door wide open for more. The Bank stated clearly that if the economic and price outlooks presented in their October report continue to be realised, they will "continue to raise the policy interest rate."
However, the "pace" of these hikes remains the big question. During his post-decision press conference, Governor Ueda emphasised that future moves will be strictly data-dependent. Furthermore, the Governor noted that it remains difficult to pinpoint the neutral rate, the level where policy neither stimulates nor restricts the economy, suggesting that the BOJ will move with caution as they navigate this uncharted territory.
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