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In a historic move concluding its December meeting, the Bank of Japan (BoJ) unanimously raised its key policy rate to 0.75%, marking the highest level since 1995. The decision underscores growing confidence that Japan has finally emerged from decades of deflation, with core inflation consistently above the 2% target.
BoJ Statement Highlights
The BoJ confirmed it will continue to raise the policy rate if economic and price trends align with its forecasts.
Policy will be conducted with the aim of sustainably achieving the 2% inflation target while avoiding excessive tightening that could destabilize financial conditions.
Wages and inflation are expected to rise moderately in tandem, indicating price pressures are increasingly driven by domestic demand rather than temporary cost shocks.
Market Reaction: “Sell the Fact”
Despite the rate hike, the Japanese Yen weakened slightly against the U.S. Dollar, with USD/JPY approaching 156.00. This classic “buy the rumor, sell the fact” move reflects that markets had already priced in the hawkish shift, prompting traders to unwind positions.
Japanese equities, meanwhile, found relief in the removal of uncertainty, with the Nikkei recovering some ground post-announcement.
What’s Next
All eyes now turn to Governor Kazuo Ueda’s post-meeting press conference, where investors seek guidance on the pace of future normalization. With real interest rates still negative despite inflation above target, the consensus suggests the start of a gradual tightening cycle. Many economists forecast the next potential hike around mid-2026, depending on the outcome of next spring’s wage negotiations.
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