BOJ Hikes to 0.75% and Signals More Tightening if Wages and Inflation Stay Firm

The Bank of Japan (BOJ) raised interest rates by 25 basis points on Friday, lifting its short-term policy rate to 0.75% from 0.5% in a widely expected move that marks the bank’s second hike of the year after January’s increase.

The decision was unanimously approved by the BOJ’s policy board, and the tone of the accompanying statement leaned hawkish: officials said they are prepared to raise rates further if economic conditions improve and inflation remains elevated.

Why the BOJ thinks it can keep tightening

The central bank pointed to a wage-inflation dynamic that it expects to remain intact into 2026. The BOJ said it anticipates:

• Steady wage increases in 2026
• Improving corporate profits
• A tight labor market, supporting firmer pay growth

Together, the BOJ argued these conditions make it “highly likely” that wages and inflation will rise moderately going forward—keeping the case alive for additional normalization.

Real rates still negative, policy still accommodative

Despite the hike, the BOJ stressed that real interest rates remain “significantly negative,” and overall financial conditions are still accommodative. In other words: policy is moving away from ultra-easy settings, but the bank is signaling it still has room to tighten without choking growth—especially if the data cooperates.

Capital Economics summed up the message as a tightening cycle that likely “has further to run,” arguing incoming data could still surprise to the upside.

Inflation outlook: temporary cooling, then re-acceleration

The BOJ expects core CPI to slow below 2% through the first half of fiscal 2026, before picking up steadily thereafter. That forecast keeps policy debate alive: the near-term dip may limit urgency, but the expected re-acceleration supports the BOJ’s willingness to keep tightening.

Market reaction: gains pared, yen steadier

Markets had largely priced in the hike, and the immediate price action reflected that:

• Nikkei 225 trimmed gains but remained higher, up about 1.1%
• USD/JPY gave back some intraday moves, last around 155.81 (yen slightly firmer on the day)

Investors’ next focus is BOJ Governor Kazuo Ueda’s press conference, which will be key for reading whether the BOJ is guiding toward a faster follow-up hike or maintaining a cautious, data-dependent pace.