Published: Friday, December 19, 2025 · 9:54 AM | Updated: Friday, December 19, 2025 · 9:54 AM
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(Bloomberg) — The Bank of Japan raised its benchmark interest rate to the highest in 30 years and signaled more hikes are likely in the pipeline, yet the yen weakened from disappointment that the messaging from the central bank wasn’t stronger.
Governor Kazuo Ueda’s policy board increased the rate by a quarter percentage point to 0.75% in a unanimous decision, according to its statement Friday. The central bank cited the rising likelihood of its economic outlook being realized, and pointed to data showing solid wage growth momentum and receding risks from US tariffs. The rate change was expected by all 50 economists surveyed by Bloomberg.
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The BOJ made it clear that the hiking cycle will continue by asserting that it intends to keep raising borrowing costs if its economic outlook is realized, and the chances of that happening are increasing. It also said that underlying inflation is continuing to rise moderately.
“We’ll keep making appropriate decisions at each policy meeting,” Ueda said during his post-decision press conference. “The pace at which we adjust our rate will depend on the state of the economy and prices.”
While market participants were closely watching whether Ueda will give further clarity on where he sees the neutral rate — the level at which the policy rate is neither stimulative nor restrictive — the governor continued to say it’s difficult to judge where that rate may precisely be. The central bank sees the rate as roughly somewhere between 1% and 2.5%.
“Of course it would be great if we can have a better idea of where the neutral rate is, but it’s not easy,” said Ueda, while noting that the current rate was still below the lower end of the estimated range.
What Bloomberg Economics Says…
“The decision statement describes rates as “at significantly low levels,” even as they edge toward the BOJ’s 1% estimate for the lower bound of neutral. That suggests the bank now sees neutral as higher, giving it room to tighten further.”
— Taro Kimura, economist
Click here to read the full report
The yen weakened past 157.10 against the dollar after Ueda spoke, suggesting that traders were looking for stronger messaging around further hikes ahead. It was trading around 155.80 before the decision.
“The market was looking for clear hawkish signals,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “Of course, the BOJ said that Japan’s real rate is significantly low and that suggests more hikes to come, but Ueda’s comments alone almost sounded like the rate hike cycle could end soon.”
Japanese government bond yields rose after the decision, with the yield on the benchmark 10-year bond climbing above 2% and hitting the highest level since 1999. The Nikkei 225 Stock Average had earlier closed 1% higher.
The policy change underscored Ueda’s determination to keep raising rates, as inflation gradually embeds itself into the economy in a major shift from decades of weak prices, following the early 1990s bursting of an asset bubble. Earlier Friday, data showed that a key gauge of consumer prices rose 3% in November, extending the streak of months at or above the BOJ’s 2% inflation target to 44.
“I think the BOJ will continue raising rates at a pace of around once every six months or so,” Kazuo Momma, a former BOJ executive director, said on Bloomberg TV shortly after the decision, a comment largely in line with market consensus. “Maybe two rate hikes in 2026 and one more in 2027, reaching the level of 1.5%.”
While the emergence of monetary easing advocate Sanae Takaichi as prime minister in October raised doubts about Ueda’s leeway to keep normalizing policy, the political costs of continued inflationary pressure and yen weakness helped ensure that the government didn’t discourage the move.
Ueda sought to ensure there’s no perception that the central bank is working against the government’s efforts to stimulate the economy. In the policy statement the BOJ assured that accommodative monetary conditions will continue to support the economy.
“We’ve been conducting monetary policy according to our joint statement with the government,” Ueda said, referring to the agreement to seek sustainable 2% inflation established in 2013 that ushered in a period of unprecedented easing under his predecessor, Haruhiko Kuroda. “We’re now in the final phase of our efforts.”
Ueda raised borrowing costs for the first time since January following economic data signaling that President Donald Trump’s tariffs aren’t delivering a major blow to the economy. Also, various labor unions have set targets ahead of annual wage talks similar to what they set a year ago, when the process resulted in historic gains in pay, indicating that wage momentum is intact.
The market’s focus is now on the timing for future hikes, with most BOJ watchers anticipating the pace will be once every six months.
The action underscores the BOJ’s outlier status among its global peers as the only major central bank raising rates this year. Last week the Federal Reserve cut its rate for a third time this year. Even after Friday’s hike, Japan’s interest rate remains well below its inflation level, while US borrowing costs are higher than price growth there. The movements show that the two rates are converging.
This was the first unanimous rate hike decision under Ueda, projecting a united front after two of the nine board members voted against keeping the rate unchanged at the last two gatherings. Still, two of the board’s most hawkish members objected to the description of the outlook for prices. Both Naoki Tamura and Hajime Takata said the price trend would be consistent with the bank’s inflation goal at an earlier stage than outlined.
Friday’s decision wasn’t a surprise after Ueda dropped clear hints for the change earlier this month. The central bank also flagged a likely move ahead of its previous hike back in January. Those actions suggest the central bank has sought to make its messaging clearer after a rate increase in July 2024 caught some investors by surprise and helped trigger global market turmoil.
Most BOJ watchers suspect the recent depreciation of the yen was a key reason prompting Ueda to drop such strong hints before taking action. The yen hit the lowest level in 10 months last month, approaching the key threshold of 160 against the greenback and prompting warnings from financial authorities.
Takaichi made no explicit attempt to stop the BOJ from hiking rates this time, with some 98% of surveyed BOJ watchers citing the yen’s fall as the likely reason for that. The weak currency could intensify domestic inflationary pressures via higher import costs, jeopardizing her goal of reducing the hit to households from inflation.
Public discontent over soaring costs of living led to Takaichi’s ruling Liberal Democratic Party taking major hits in the last two national elections before she took office in October.
With a history of political backlash against the BOJ’s rate hikes in the 2000s, analysts will be closely looking at Ueda’s communications with Takaichi’s government to forecast the BOJ’s path ahead.
“The BOJ has to run alongside the fiscally expansionary Takaichi administration,” said Daisuke Karakama, chief market economist at Mizuho Bank. “The bottom line was Ueda wasn’t able to say something that would clearly increase hawkish messaging.”
–With assistance from Yoshiaki Nohara, Brett Miller, Erica Yokoyama and Keiko Ujikane.
(Updates with economist comments, latest market figures.)
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