Tokyo: The Bank of Japan (BOJ) is preparing to raise its key policy rate in December, signaling a potential shift from decades of ultra-loose monetary policy. According to sources familiar with the matter, the central bank plans to increase the benchmark interest rate from 0.50% to 0.75% at its policy meeting later this month. Officials also indicated that the Japanese government is expected to accept the move, marking a notable alignment between monetary and fiscal authorities.
If implemented, this would be the first significant rate hike by the BOJ since January, when it had previously nudged rates upward. The planned increase reflects growing confidence within the central bank that Japan’s economy can handle a gradual tightening of financial conditions. While the administration led by Prime Minister Sanae Takaichi has traditionally favored looser monetary policy, government sources stressed that no explicit opposition would be raised, allowing the BOJ to act independently.
The decision comes amid several economic pressures. A weakening yen has amplified import-driven inflation, while domestic wage growth and strong corporate earnings suggest that consumer prices could continue rising. Central bank officials have emphasized that the move is a measured step to “ease off the accelerator” rather than a sudden contraction, reflecting a cautious approach to normalizing policy.
Financial markets have responded swiftly to the news. Yields on Japanese government bonds, particularly the 10-year, surged to levels not seen in nearly two decades. The Japanese yen strengthened moderately against the U.S. dollar, reflecting increased investor confidence that the BOJ may finally begin to phase out years of near-zero interest rates. Market analysts currently assign roughly an 80% probability to the rate hike taking place at the December meeting.
Despite the anticipated increase, uncertainty remains over the pace and extent of future rate hikes. The BOJ has previously identified Japan’s “neutral rate” the level at which borrowing neither stimulates nor restricts growth to range between 1.0% and 2.5%, leaving open questions about how the economy will respond to successive increases. Analysts are closely monitoring upcoming wage data, global monetary developments, and the government’s coordination with the central bank.
If the rate hike proceeds as expected, it may mark the beginning of a gradual normalization of monetary policy in Japan after decades of exceptionally low rates. However, officials remain cautious, emphasizing that any future adjustments will depend on evolving domestic and international economic conditions, as well as the BOJ’s ongoing assessment of inflationary pressures.
This anticipated policy shift underscores Japan’s cautious but decisive step toward aligning its financial system with the broader global economic environment, signaling a new era for the country’s monetary policy.