On December 19, 2025, the Bank of Japan (BOJ) did just that. It recently raised its policy rate to the highest level in thirty years. This decision reflects the central bank’s response to encouraging signs of wage growth and the continued depreciation of the yen, signaling a shift in Japan’s monetary landscape.
The BOJ’s move marks the BOJ’s most significant departure in its decades-long practice of fighting against monetary stimulus. In defending the decision, Governor Kazuo Ueda stressed that strong momentum in advancing wage growth was a key factor impacting the decision. This wage growth has been a key force in driving inflation down to the central bank’s target. He acknowledged that the weakening yen had a role to play in this decision. It would raise the cost of imports, leading to rising costs overall in an inflationary economy.
Governor Ueda stopped short of offering concrete direction on upcoming hikes. He reiterated that adjustments to monetary policy are conditional on economic health. He pointed out that it’s the price changes that are most important in driving these decisions. His comments further illustrated the bank’s dovish turn as it seeks to steer Japan through an awkward economic rebound while battling billowing inflationary forces.
Clarity was not originally Governor Ueda’s strong suit when he announced his plans, either. This had investors and analysts guessing what future rate moves may bring, when they’d happen, and by how much. He indicated that the pace of these adjustments would depend not only on economic indicators but on broader price developments, suggesting an adaptable strategy moving forward.
Additionally, he noted the useful aspect of the neutral rate because it indicates the interest rates required to maintain a steady economy. We estimate this rate will continue to be within a wide bandwidth. This signal, in part, reflects the central bank’s intention to maintain an accommodative monetary policy. It will revamp its strategy in response to the economic reality as conditions evolve.
Until then, the BOJ has been emboldened to raise the policy rate. That decision marks a departure from its prior stance of keeping interest rates low to spur economic development. Moving forward, market participants will be watching closely to see how these policy moves affect the pace of Japan’s economic recovery and the progress toward its inflation target.