Bank of Japan raises benchmark rates to highest in 30 years,

Bank of Japan raises benchmark rates to highest in 30 years, lifting 10-year JGB yield past 2%

KEY POINTS

• The yield on 10-year Japanese government bonds breached the 2% mark for the first time since 2006.
• BOJ: Real interest rates are expected to remain significantly negative.
• BOJ: While weakness has been seen in Japans economy, corporate profits are likely to remain high.
• BOJ: Firms are likely to continue raising wages in 2026 and pass on wage increases to selling prices.

• Japans central bank on Friday raised its short-term rates to a three-decade high, marching ahead with its policy normalization, as inflation has stayed above its target levels for nearly four years now.

  The Bank of Japan raised benchmark rates by 25 basis points to 0.75%, their highest level since 1995, and in line with expectations of economists polled by Reuters.

• The BOJ said that real interest rates are expected to remain significantly negative, adding that accommodative financial conditions will continue to firmly support economic activity.

  Following the decision, the yield on 10-year Japanese government bonds breached the 2% mark for the first time since 2006, while theyenweakened 0.20% to 155.79 against the dollar. The benchmarkNikkei 225stock index gained 1.21%.

• Japan embarked on policy normalization last year, abandoning the worlds only negative interest rate regime that had been in place since 2016. Since then, the BOJ has consistently maintained its stance on gradually lifting rates, stating that its goal was to see a virtuous cycle of rising wages and prices.

  Inflation has run above above the BOJs 2% target for 44 straight months, withdatareleased earlier in the day showing consumer price growth at 2.9% in November. High inflation has pressured real wages thathave been declining for 10 monthsin a row, according to labor ministry data.

  The BOJ projected that core inflation which strips out the prices of fresh food is likely to decelerate below 2% from April to September 2026, due to a slower rise in food prices as well as the effects of government measures aimed at addressing rising prices.

• Higher rates risk exacerbating the downturn in the Japanese economy.Revised GDP numbersfor the third quarter showed that economy shrank more than initially estimated, contracting 0.6% quarter on quarter, and 2.3% on an annualized basis.

  The BOJ said in its statement that while weakness has been seen in the economy, corporate profits were likely to remain high, and firms are expected to continue raising wages in 2026.

  It is highly likely that the mechanism in which both wages and prices rise moderately will be maintained, the bank said, adding that the possibility of underlying inflation reaching its 2% target was rising.

  The rate hike also comes at a time when JGB yields have beenhitting multi-decade highs, spiking further after the decision, raising the risk of higher borrowing costs for Japan and increasing fiscal strain.

  Asias second-largest economy already boasts of the worlds highest debt-to-GDP ratio, standing at almost 230%, according to data from the International Monetary Fund.

  Rising yields could, however, support the Japanese currency. The yen has been trading around 154-157 against the dollar since November, having weakened over 2.5% since Prime Minister Sanae Takaichi, a proponent of looser monetary policy, took office in October.

• After this hike, the BOJ is likely to raise its policy rate in mid-2026, taking it to a terminal rate of 1%, Shigeto Nagai, head of Japan Economics at Oxford Economics, said in a statement to CNBC before the BOJ decision. Terminal or neutral rate refers to one that balances inflation and economic growth it neither overheats, nor slows down the economy.

  BOJ Governor Kazuo Uedareportedly saidearlier this month that it was difficult to estimate the terminal rate, with the central bank pegging it at 1% to 2.5%.

  Nagai warned that another rate hike by the BOJ could cause friction with Takaichi, if inflation declines smoothly towards 2% in the first half of 2026.

  Takaichiduring her leadership contesthad staunchly opposed rate hikes by the BOJ, but has since softened her stance.

  Nagai said that the reasons that Takaichi would accept this rate hike was because of the weak yen, and that addressing the cost-of-living crisis has become an urgent policy issue.

  In November, Japans cabinetapproved a stimulus packagetotaling 21.3 trillion yen ($135.5 billion) as Takaichi seeks to boost the countrys slowing economy and offer support to inflation-hit consumers.