The Bank of Japan is expected to raise interest rates to 0.75% this week, reaching the highest level in nearly 30 years since 1995.
According to the latest report by the Nikkei, the Bank of Japan (central bank) is most likely to announce a plan to raise the policy interest rate from the current 0.5% to 0.75% during the monetary policy decision meeting scheduled for December 18 to 19.
If this interest rate hike materializes, it will be the first increase by the Bank of Japan since January 2025, and it also means that the policy interest rate will reach the highest level in nearly thirty years since 1995.
Unlike previous decisions, there is a strong consensus within the government regarding this interest rate hike. First, officials, including Governor Ueda Kazuo, have signaled a potential rate increase;
Secondly, surveys show that more than half of the nine policy members support it, with no one publicly opposing it; this series of consensus also confirms the general acceptance of this move by the country's government.
It is worth noting that prior market concerns about the impact of U.S. tariff policies on the Japanese economy are now generally considered to have less impact than expected, which has cleared a major obstacle for the central bank to restart interest rate hikes.
In addition, the central bank's optimistic view on wage growth prospects for 2026 also provides solid support for the continued rebound in inflation.
This potential interest rate hike is mainly driven by the long-term weakness of the yen (the current yen to dollar exchange rate is around 155), leading to rising import prices and inflationary pressures. This move is also seen as an effective means by the country's central bank to curb the continued depreciation of the yen and alleviate inflation by narrowing the interest rate gap with the U.S.
However, analysts generally believe that, given that the interest rate hike signals have been fully digested by the market, unless there are unexpected developments in the decision, the risk of this move triggering significant market turbulence is low.
Currently, the market focus has completely shifted to the statements of Governor Ueda Kazuo regarding the future policy path after the interest rate hike. Investors will also closely watch his remarks on the pace of subsequent rate hikes and the final interest rate target.
Overall, the potential interest rate hike indicated by the Governor of the Bank of Japan marks a shift in Japan's monetary policy focus from economic stimulus to combating inflation and maintaining exchange rate stability, and the far-reaching impact of this policy on global capital flows and financial market asset pricing is self-evident.