Japan’s central bank delivered a widely anticipated tightening step that still carried market punch. The Bank of Japan raised its policy rate by 25 bps to 0.75%, the highest level since 1995, as inflation remains above its 2% target for years. The move underscores how far Japan has traveled from its long era of ultra-easy policy, even while growth remains fragile.
Immediate market impact was concentrated in rates and FX. The 10-year JGB yield breached 2% for the first time since 2006, while the yen weakened to roughly 155.79 per dollar after the decision. Local equities took it in stride. Nikkei 225 rose 1.21%, helped by global risk-on sentiment after the U.S. CPI surprise.
The “why” is a mix of sticky inflation and a desire for policy normalization without slamming the brakes. Japan’s inflation is still running hot by domestic standards. Consumer inflation stayed above the 2% target for a 44th month, with core inflation at 3.0% in November. Yet the BOJ insists policy remains accommodative. It said real rates will stay “significantly negative”, aiming to preserve a wage-price cycle while acknowledging signs of economic weakness.
The tension is fiscal and growth sensitivity. Japan’s debt burden is enormous. IMF data put debt-to-GDP near 230%, so sustained higher yields raise debt-service anxieties and could tighten financial conditions faster than intended. Meanwhile, the economy has already shown strain. Revised Q3 GDP contracted 0.6% q/q (2.3% annualized), sharpening the risk that “normalization” collides with weak demand.
For readers, Japan is no longer a passive anchor for global yields. If JGB yields keep rising, it can ripple into global bond markets and FX hedging costs, and potentially tighten global financial conditions even as the Fed debates cuts. Watch whether the yen strengthens on rate differentials, or stays weak due to fiscal concerns and policy credibility.
