The Bank of Japan (BOJ) will raise interest rates to 0.75%

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The BOJ will hold a monetary policy meeting on December 18-19 to raise its current policy rate of 0.5%, and is currently in the final coordination stage. The most likely scenario is a rate hike of 0.25% to 0.75%, reaching the highest level in 30 years since 1995.

BOJ Governor Kazuo Ueda and other senior officials have hinted at their intention to submit a rate hike proposal. Interviews with the Nikkei indicate that more than half of the nine policy board members, including the BOJ’s president and deputy governor, are expected to support the proposal.

This will be the first time the BOJ has raised its policy rate in 11 months since January 2025. Following the collapse of Japan’s bubble economy in the 1990s, the BOJ lowered the official discount rate, then equivalent to the policy rate, from 1.0% to 0.5% in September 1995. This will be the first time the policy rate has exceeded 0.5% since then.

Currently, no policy board member has explicitly expressed opposition to the rate hike, and there is widespread approval within the Japanese government.

Due to concerns about the adverse impact of the Trump administration’s tariff policies on the Japanese economy, the Bank of Japan (BOJ) has maintained its interest rate unchanged for six consecutive meetings since its January 2025 meeting, following its decision to raise rates. Currently, there is a general consensus within the BOJ that the impact of Trump’s tariff policies on the Japanese economy and prices is smaller than anticipated in the spring of 2025.

Currently, the yen is hovering around 155 yen to the dollar, with yen depreciation becoming the norm. The BOJ believes that yen depreciation could exacerbate inflation in Japan by pushing up import prices.

Some argue that the still large interest rate differential between Japan and the US is one reason for the continued yen depreciation. Interest rate hikes are expected to curb yen depreciation to some extent. The market is closely watching what comments Kazuo Ueda will make regarding the pace of future interest rate hikes.

The BOJ will make its final decision after assessing whether there will be market turmoil such as a stock market crash or a sharp appreciation of the yen.