Policy Rate Remains at Multi-Decade High

Following a two-day policy meeting, the BOJ confirmed that it would maintain its benchmark interest rate at 0.75%. The move came after the bank raised rates in December, and economists had largely expected policymakers to pause and assess the impact of that increase.

At current levels, borrowing costs in Japan stand at their highest point in roughly three decades. The central bank emphasized that it is carefully monitoring how the previous hike is filtering through the economy, while also keeping an eye on political developments that could influence fiscal policy.

In particular, uncertainty surrounding Prime Minister Sanae Takaichi’s decision to call a snap election next month has added another layer of complexity to the policy outlook.

Hawkish Voices Growing Within the Board

Although the headline rate decision was unanimous, internal dynamics at the BOJ suggest a gradual shift in tone. Board member Hajime Takata once again proposed a rate hike, marking the second consecutive meeting in which he has done so.

While his proposal did not gain broader support, it underscores a growing hawkish undercurrent within the central bank, signaling that the debate over further tightening is becoming more active.

Growth and Inflation Outlook Revised Higher

The BOJ’s quarterly outlook report provided clearer insight into this evolving stance. The central bank upgraded its economic growth forecasts for fiscal years 2025 and 2026, maintaining its assessment that Japan’s economy remains on track for a moderate recovery.

More notably, the BOJ revised its core inflation forecast for fiscal 2026 upward to 1.9%, from 1.8% previously. Officials noted that risks surrounding economic activity and price developments are now broadly balanced, a subtle but meaningful shift from earlier caution.

Wage-Price Cycle Seen as Intact

In its report, the BOJ reaffirmed its view that a positive cycle between wages and prices is gradually strengthening. According to policymakers, steady wage growth alongside moderate price increases should support a continued rise in underlying inflation over time.

The central bank also highlighted the increasing influence of currency movements on domestic prices. A weaker yen, it warned, could amplify inflationary pressures by shaping public expectations about future price trends.

Markets Focus on Governor Ueda’s Guidance

Investor attention has now turned to BOJ Governor Kazuo Ueda’s post-meeting press conference. Markets are searching for clues on the timing of the next rate hike, particularly in light of recent volatility linked to political uncertainty and rising government bond yields.

HSBC’s Chief Asia Economist Fred Neumann noted that the revised outlook reflects a clear shift toward a more hawkish narrative. According to Neumann, upward revisions to both growth and inflation expectations keep upcoming policy meetings firmly “live” for further rate increases.

Rising Bond Yields Complicate Policy Balance

At the same time, Japan’s bond market has come under pressure. Prime Minister Takaichi’s plans to expand fiscal support—alongside proposals to suspend the 8% sales tax on food—have raised concerns about increased government borrowing, pushing yields higher.

This presents a delicate challenge for the BOJ. On one hand, the bank aims to maintain hawkish communication to prevent excessive yen weakness. On the other, it must avoid triggering a sharp rise in bond yields that could undermine economic stability.

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A December Decision: Markets Brace for a 25 bps Increase

The policy meeting scheduled for December 18–19 is expected to confirm the BoJ’s commitment to continuing its normalization process. Current market pricing reflects an anticipated adjustment of the benchmark rate from 0.50 percent to 0.75 percent. Governor Kazuo Ueda’s recent public statements have consistently pointed toward the need for further tightening, reinforcing expectations that the central bank intends to follow through.

A Data-Driven Path: BoJ Mirrors the Fed’s Approach

Insights shared with Reuters indicate that Japan’s central bank will adopt a strategy similar to that of the U.S. Federal Reserve, basing future decisions on the trajectory of economic data. The pace of subsequent rate increases will depend heavily on how domestic activity responds to tighter financial conditions. Sources familiar with internal discussions suggest policymakers still view Japan’s rates as exceptionally low, leaving the institution with considerable room to act.

A Level Unseen Since 1995

If implemented, the expected hike would move Japan’s policy rate to 0.75 percent — a level last recorded in 1995. Despite decades of ultra-accommodative policy, the country now faces an inflation rate of around 3 percent, notably above the BoJ’s 2 percent target. For years, low borrowing costs enabled Japanese investors to access credit with ease and deploy capital globally, contributing to more than 12 trillion dollars in overseas assets.

A shift toward higher domestic yields raises the prospect of capital flowing back into Japan, a scenario that global financial markets are monitoring with caution.

Market Repercussions: Japan Policy Moves and Bitcoin’s Sharp Drop

Japan’s previous rate adjustments have already demonstrated their influence on global markets. The hike implemented at the end of July 2024 coincided with an unexpected financial shock in the United States, leading Bitcoin to fall to 49,000 dollars on August 5. Although the cryptocurrency market later recovered — aided by Donald Trump’s U.S. election victory — the episode underscored the sensitivity of global risk assets to changes in Japanese monetary policy.

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Clear Signs of Economic Slowdown

In his remarks, Kashkari clearly stated that the economy is slowing. On the other hand, he noted that the impact of tariffs on inflation is still not fully understood. Despite this uncertainty, he said it may still be appropriate to begin adjusting the policy rate in the short term.

Two Rate Cuts Still Possible This Year

Kashkari stated that two rate cuts by the end of 2025 are still a valid scenario. However, there is an important condition here: if inflation starts to rise due to tariffs, the Fed may halt these cuts or even shift to a rate hike if necessary.

“Reversing Course May Be Better Than Waiting”

Kashkari emphasized that the time may have come to reverse course in rate policy, stating, “Reversing course may be better than waiting.” This message supports expectations that the Fed could move toward a monetary easing path in the fall.

Tariffs and Inflation Uncertain, But the Data is Clear

Kashkari said, “We don’t yet know what will happen with inflation, but the data we have on the slowdown is quite clear.” This indicates that the Fed may act based on growth data, even in the face of a murky inflation outlook.

Polymarket Data: Strong Rate Cuts Expectations

Meanwhile, with only 41 days left until the FOMC meeting on September 17, 2025, market expectations are already forming. According to Polymarket data:

• A 7% chance of a 50 basis point cut is expected,

• A 75% probability of a 25 basis point cut is projected,

• A 19% likelihood suggests no change in rates.

These figures indicate that markets are largely positioning toward a rate cut scenario.

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