On the morning of December 19, the Bank of Japan announced as scheduled that it would raise the benchmark interest rate from 0.5% to 0.75%. This is the Bank of Japan’s second interest rate hike in 11 months since January 2025. The interest rate level hit a 30-year high, in line with the 99% interest rate hike expectation in the market. This interest rate hike marks the Bank of Japan’s gradual withdrawal from the ultra-loose monetary policy that has lasted for many years, which will have a far-reaching impact on the global financial market and Japan’s domestic economy.

The core reason for the Bank of Japan’s interest rate hike this time is the persistently high inflation and the moderate economic recovery. Japan’s core CPI rose by 2.8% year-on-year in November, which has been higher than the 2% target for 23 consecutive months. The tight labor market has pushed up wage growth, and the average wage increased by 3.2% year-on-year in October, providing support for inflation. At the same time, Japan’s GDP grew by 0.3% quarter-on-quarter in the third quarter, and exports and manufacturing showed signs of recovery, providing an economic basis for the interest rate hike.

After the policy was implemented, the Nikkei 225 Index rose slightly by 0.5% to 33522.5 points. Bank stocks performed prominently. Mitsubishi UFJ Financial Group rose by 1.8%, and Sumitomo Mitsui Financial Group rose by 1.5%. The yen appreciated by 0.4% against the US dollar in the short term to 141.20, and then remained stable. For Japan’s real estate market, the interest rate hike will increase mortgage costs, which may further suppress the sluggish real estate market. Bank of Japan Governor Kazuo Ueda said that in the future, he will flexibly adjust policies according to economic and inflation conditions and will not preset the interest rate hike path. The market expects the Bank of Japan may raise interest rates 1-2 more times next year, gradually moving closer to the normal interest rate level.