BOJ Raises Its Interest Rate to Three Decades High

Bank of Japan (BOJ) decided, with a unanimous vote, to set a guideline for money market operations, which would encourage the collateralized overnight call rate to remain at around 0.75 percent, at its monetary policy meeting (MPM) on December 19th. The rate marked the highest level since 1995. The bank recognized that the trend of wage hike would continue to 2026 with moderate economic growth. 

“Japan’s economy has recovered moderately, although some weakness has been seen in part,” BOJ described in its document on the discussion in its MPM. The bank raised the interest rate for the first time since it set at 0.5 percent in January, 2025. The main reason for the interest hike was the bank’s optimistic view on further wage hike for next year.

 

“Corporate profits are expected to remain at high levels on the whole, even after taking into account the impact of tariff policies. In this situation, considering factors such as the stances of labor and management on the annual spring labor management wage negotiations, -- it is likely that firms will continue to raise wages steadily next year, following solid wage increases this year, and the risk of firms’ active wage-setting behavior being interrupted is expected to be low,” says BOJ in the document.

 

The employers raised the wage for their employees by 5.33 percent in average in the spring labor negotiation in 2024 and by 5.52 percent in 2025. Based on information obtained by local branches on situation of local economy, BOJ believes that the trend of current wage hike will continue in the spring negotiation in 2026. “It is highly possible that mechanism of gradual hike in wages and prices will be maintained,” said BOJ Governor Kazuo Ueda in his press conference after the MPM.

 

The bank realized that tariffs imposed by U.S. President Donald Trump on Japan’s products has not as badly affected Japan’s economy as they had anticipated. “While uncertainties remain regarding the U.S. economy and the impact of trade policy in each jurisdiction, these uncertainties have declined,” said the MPM document. “As we saw the result of our short-term economic survey (Tankan) in December, the plan of financial balance of each company was revised upward from three months ago,” said Ueda in his press conference.

 

Ueda also expected that there would be another opportunity for further increase of the interest hike, if the level of wage keeps on rising. He insisted that current real interest rate was still at a low level and willing to adjust the rate as the bank assesses information or data.

 

The long-term bond rate surged to the level of 2 percent on December 19, immediately after BOJ announced its interest rate hike. The bond rate rises when its price is declining. As investors have been worried about Prime Minister Sanae Takaichi’s economic policies that would exacerbate financial balance of the government, BOJ’s interest hike caused further concern on Japan’s economy. It seems that Takaichi and BOJ have yet established a firm communication channel to stabilize the markets.

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