BoJ Poised for Historic Rate Hike as Markets Brace for Policy Shift

Japan’s central bank is approaching a pivotal moment, with markets widely expecting an interest rate increase that would lift borrowing costs to their highest level in nearly 30 years. The decision, due at the end of the bank’s final policy meeting of the year, is seen as another decisive step away from decades of ultra-loose monetary policy.

Market pricing strongly suggests a 25-basis-point hike, taking the benchmark rate to around 0.75%, a level not seen since the mid-1990s. Such a move would reinforce the central bank’s commitment to normalizing policy after years of near-zero or negative rates and extensive stimulus measures aimed at fighting deflation.

While the rate increase itself is largely anticipated, investor attention is expected to shift quickly to the central bank’s guidance. Even with a hike, real interest rates are likely to remain negative, leaving room for further tightening over time. The tone of official communication will therefore be critical in shaping expectations about the pace and limits of future moves.

The decision is also being closely watched beyond Japan’s borders. A shift toward higher rates could strengthen the yen and reduce the appeal of yen-funded carry trades, potentially triggering adjustments in global capital flows. Such changes may help curb imported inflation domestically but could add volatility to international currency and bond markets.

Despite persistent inflation running above target levels, Japan’s broader economic outlook remains fragile. Recent data have pointed to weaker growth momentum, raising concerns that higher borrowing costs and a firmer currency could weigh on consumption and investment at a sensitive time for the economy.

Higher interest rates also pose challenges for public finances. Government bond yields have risen sharply, increasing debt servicing costs for one of the world’s most heavily indebted governments. As borrowing costs climb, pressure is mounting even as authorities prepare expansive fiscal measures to support the economy.

Overall, the expected rate hike marks a historic turning point for Japan’s monetary policy. While it signals confidence in moving away from emergency-era measures, it also underscores the delicate balance policymakers face between controlling inflation, supporting growth, and managing financial stability at home and abroad.