Bank of Japan raises benchmark rates to highest in 30 years

Japan's 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, Report informs via CNBC.

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 the yen weakened 0.20% to 155.79 against the dollar. The benchmark Nikkei 225 stock index gained 1.21%.

Japan embarked on policy normalization last year, abandoning the world's 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 the BOJ's 2% target for 44 straight months, with data released earlier in the day showing consumer price growth at 2.9% in November. High inflation has pressured real wages that have been declining for 10 months in 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 numbers for 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.