In a historic move not seen in over three decades, the Bank of Japan (BoJ) on Friday raised interest rates to levels last witnessed in 1995, marking a decisive shift away from its long-standing ultra-loose monetary policy.
The central bank increased its short-term interest rate from 0.5% to 0.75%, the first hike since January, following a unanimous decision by policymakers. This step effectively signals an end to decades of aggressive monetary stimulus and near-zero borrowing costs that Japan had relied on to combat deflation.
The Bank of Japan also indicated that it is prepared to continue raising interest rates beyond next year, underlining growing confidence that the economy is on a stable path toward sustained inflation.
“With wage growth supporting demand, Japan is moving steadily toward achieving its 2% inflation target in a sustainable manner,” the central bank said, emphasizing its readiness to normalize monetary policy further.
Despite the rate hike, the BoJ noted that real interest rates are expected to remain significantly negative, ensuring that financial conditions continue to support economic activity. Favorable funding conditions, it said, will still help sustain growth even as policy tightens.
The latest move brings interest rates to levels unseen since Japan was struggling to recover from the bursting of its asset price bubble in the mid-1990s—a crisis that forced the central bank into a prolonged battle against deflation.
Friday’s hike also moves rates closer to what the BoJ considers a neutral level for the economy, estimated to lie between 1% and 2.5%. However, this makes future policy decisions more complex, as the bank must carefully balance inflation control with economic growth.
Recent data supports the central bank’s cautious optimism. Core consumer inflation stood at 3.0% in November, unchanged from the previous month but still well above the BoJ’s 2% target. A weakening yen has further pushed up import costs, contributing to broader inflationary pressures. With inflation remaining elevated and wage growth improving, Japan’s monetary landscape appears to be entering a new era—one that could reshape financial markets both domestically and globally.
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