Bank of Japan Raises Interest Rates to Highest Level in 30 Years

Tokyo: The Bank of Japan (BOJ) on Friday raised its benchmark interest rate to the highest level in three decades, continuing its gradual move away from ultra-loose monetary policy as inflation remains above target.

The central bank increased its short-term policy rate by 25 basis points to 0.75%, a level not seen since 1995 and in line with market expectations. The BOJ said real interest rates are expected to remain “significantly negative,” indicating that financial conditions will continue to support economic activity.

Following the announcement, the yield on 10-year Japanese government bonds rose above 2% for the first time since 2006. The yen weakened slightly, trading near 155.8 against the dollar, while the Nikkei 225 index climbed more than 1%.

Inflation and Policy Outlook

Inflation in Japan has stayed above the central bank’s 2% target for nearly four years. Latest data showed consumer prices rose 2.9% in November, reinforcing the BOJ’s view that price pressures remain entrenched.

Despite the rate increase, policymakers stressed that accommodative conditions will remain in place. The BOJ reiterated its aim to achieve a stable cycle in which wages and prices rise together, supporting sustainable economic growth.

Economic Risks Remain

Japan’s economy continues to face challenges. Revised figures showed the economy contracted 0.6% in the third quarter, equivalent to an annualized decline of 2.3%. The central bank acknowledged the slowdown but said corporate profits are expected to remain strong, with firms likely to continue raising wages in 2026.

Rising bond yields could increase borrowing costs for the government, which already holds the world’s highest debt-to-GDP ratio, close to 230%. Economists expect the BOJ to consider further rate increases in 2026, depending on inflation trends and economic conditions.