Market analysts are increasingly forecasting that the Bank of Japan will lift its benchmark interest rate to 1.5% at its December policy meeting, a move that would mark another step in Japan’s gradual shift away from ultra-loose monetary policy.
The Bank of Japan has spent decades keeping interest rates near or below zero to fight sluggish growth and chronic low inflation. That era appears to be ending. A growing number of economists and market watchers now expect the central bank to raise its policy rate to 1.5% before the year is out, continuing a tightening cycle that has gained momentum in 2024 and into 2025.
A move to 1.5% would still leave Japanese borrowing costs well below those in the United States or Europe, but the direction of travel matters. Higher rates in Japan affect global financial markets in ways that go beyond Japan’s borders. Japanese investors have for years borrowed at near-zero rates at home and invested the proceeds in higher-yielding assets abroad — a strategy known as the carry trade. As Japanese rates rise, those flows can reverse, putting pressure on asset prices elsewhere.
The yen also tends to strengthen when the Bank of Japan tightens policy, since higher rates make yen-denominated assets more attractive to global investors. A stronger yen, in turn, can weigh on Japanese exporters, which is one reason the central bank has historically moved slowly and signaled its intentions well in advance.
Inflation in Japan has held above the Bank of Japan’s 2% target for an extended stretch, giving policymakers cover to continue raising rates. Wage growth — long a missing piece of Japan’s economic recovery — has also picked up, strengthening the case for tighter policy.
The December meeting date means the Bank of Japan will have several more months of economic data to assess before making a final decision. Any shift in the global outlook — a sharp slowdown in China, a U.S. recession, or renewed financial market stress — could still prompt the bank to pause.
All eyes will be on Bank of Japan communications in the coming weeks for signals about the pace and scale of its next move.
