The Bank of Japan has raised interest rates! The benchmark interest rate has reached its highest level since 1995. The market is now betting on "raising interest rates every six months."

As expected by the market, the Bank of Japan announced an interest rate hike, raising the benchmark interest rate to the highest level in 30 years in one fell swoop, and indicating that if conditions allow, further rate hikes may be pursued in the future. This latest development shows that the Bank of Japan is increasingly confident in achieving its long-term goals of stable inflation and steady wage growth that it has been pursuing for over a decade. The Bank of Japan has raised borrowing costs to their highest level since 1995, and the monetary policy statement suggests that the path of rate hikes is not over yet, leading financial markets to speculate that the Bank of Japan will raise rates every six months until reaching around 1.5%. According to the statement from the Bank of Japan on Friday, the Bank's Monetary Policy Committee, led by Governor Haruhiko Kuroda, made a unanimous decision (9-0) to raise rates by 25 basis points to 0.75%, in line with the widespread expectations of Wall Street economists. The Bank of Japan stated that the possibility of achieving its economic outlook is significantly increasing. It is worth noting that in the latest monetary policy statement, the Bank of Japan explicitly stated that the rate hike cycle will continue, indicating that if its economic outlook continues to materialize, the Bank intends to continue raising borrowing costs. The Bank also stated that potential inflation continues to rise in a moderate manner. Shortly after the announcement of the statement, the yen exchange rate weakened, with the US dollar against the yen trending upwards to around 156, contrary to the typical expectation that an interest rate hike would boost the value of the national currency. The yen continued to depreciate mainly because this rate hike had already been fully priced in by the market, and the Bank of Japan's statement displayed a neutral stance, without releasing any hawkish signals that would catch the market off guard as it did on the eve of a sharp drop in the Japanese stock market last August. Following Japan's interest rate announcement, Kei Fujimoto, a senior economist at Mitsui Sumitomo Trust, stated that the Bank of Japan's attitude towards the rate hike reflects entrenched inflation, with factors such as import prices, raw material costs, and labor costs contributing to the intensification of inflation. Harumi Taguchi, Chief Economist at S&P Global Market Intelligence, said: "I think this rate hike should have been done earlier. From the statement, the Bank of Japan's stance remains the same, that is, if the economic and price conditions develop as expected, they will continue to hike rates. This means that further rate hikes are likely in the future." "My view is generally in line with the market consensus. I believe the Bank of Japan may continue to hike rates at a rate of approximately every six months," said Kazuo Momma, a former member of the Bank of Japan's Monetary Policy Committee, shortly after the decision was announced. "Perhaps there will be two rate hikes in 2026, and another rate hike in 2027, reaching a neutral rate level of 1.5%." Is Japan finally entering a long-awaited era of "stable inflation and wage growth"? This policy change highlights the Bank of Japan's determination, under the leadership of Governor Kuroda, to continue raising interest rates amid the gradual embedding of inflation in the Japanese economy. This also marks a major turning point: after the bursting of the Japanese real estate bubble in the 1990s, Japan experienced decades of price weakness, and now Japan seems to finally be returning to the path of "inflation-wage long-term and moderate growth," a benign economic trend that the Japanese people had long been deprived of. Earlier economic data released on Friday showed that a key consumer price index in Japan rose by 3% in November, extending the streak of consecutive months achieving or surpassing Japan's 2% inflation target set by the Bank of Japan to a total of 44 months. While the strong emphasis on "Abenomics"the economic policies advocated by Japan's Prime Minister Shinzo Abe, who advocates long-term monetary easingraised doubts about Kuroda's ability to continue pushing forward with the normalization of monetary policy when he took office in October, the continuous inflation pressure and the political costs of the weakening yen led the Abe-led Japanese government to not impede this move. Under the leadership of Kuroda, the Bank of Japan raised lending costs for the first time since January, based on economic data showing that President Donald Trump's tariff policy had not significantly impacted the Japanese economy. In addition, various unions in Japan have set wage growth targets in annual wage negotiations similar to last year's strong increase, further demonstrating the Bank of Japan's determination to continue its rate hike policy; last year's wage negotiations by Japanese unions brought historically high wage growth, enough to indicate that wage growth momentum remains intact, and it is likely that this year will continue the trend of robust "inflation-wage" steady growth. Markets shift focus to rate hike pace Financial markets are now focusing on the Bank of Japan's monetary policy and on the specific timing of the future rate hike trajectory, with most observers of the Bank of Japan expecting a rate hike pace of "every six months." Currently, rate futures markets indicate that the Bank of Japan may announce another rate hike as early as June next year. This latest rate hike move also highlights the Bank of Japan's "outlier" status among global central banksit is the only major central bank globally to have announced a rate hike this year. Last week, the Federal Reserve announced its third rate cut of the year. Even after the rate hike announcement on Friday, Japanese interest rates remain significantly lower than the current inflation level in Japan, while US borrowing costs are significantly higher than the pace of price growth domestically. These changes suggest a convergence in interest rates between the two countries. Since the beginning of this year, the yield spread between Japanese and US 10-year government bonds has narrowed by 125 basis points. Despite the narrowing spread, the trend of the yen weakening in the global foreign exchange market continues. Currently, the yen exchange rate (dollar against yen) continues to hover around 156, significantly weaker than its 20-year average of 111.61, and the depreciation trend persists. This is the first rate hike decision made unanimously under Kuroda's leadership; in the two previous monetary policy meetings, two out of nine members of the Bank of Japan's Policy Board had voted against keeping rates unchanged. Nonetheless, two members voted against the Bank of Japan's characterization of the "price outlook" in this rate hike decision. Kuroda will further elaborate on his views on Friday's monetary policy decision and may provide important clues about the Bank of Japan's future rate path at a press conference that typically starts at 3:30 PM local time. Taro Kimura, a senior economist at Bloomberg Intelligence, said, "We expect him to stick to cautious communication and avoid hinting at the timing of future rate hikes. This strategic ambiguity will help prevent volatility in the yenlessons learned from the Bank of Japan's experience after the rate hike in July 2024." "In addition, the decision statement describes rates as being at 'extremely low levels,' even though rates are nearing the Bank of Japan's predicted lower limit of 1%. This indicates that the Bank of Japan now believes the neutral rate should be higher, allowing room for further tightening of monetary policy." Megumi Fujikawa, a senior analyst at the international rating agency Morningstar, said that with trade uncertainties easing and inflation remaining persistent, the stage seems to be set for the Bank of Japan to resume raising rates. "Another important factor influencing the timing of the Bank of Japan's rate hike decision is the momentum of wage growth, and definitive signs on this may not appear until March next year," said Kuroda, who stated that he is closely monitoring early signals of companies' wage plans for next year. Former members of the Bank of Japan's Policy Board have suggested that the neutral rate may be between 1.0% and 2.5%. Sources familiar with the thoughts of members of the Bank of Japan's Policy Board have indicated that this level is difficult to ascertain, and policymakers may not be able to narrow down the range in the short term. Even among observers of the Bank of Japan, there is a significant divergence in views on the neutral rate.