On January 24, 2025, the Bank of Japan (BOJ) raised its short-term policy interest rate by 25 basis points to 0.5%, marking the highest level since the global financial crisis of 2008.

The rate hike, which was approved by an 8-1 vote, is the first increase since July 2024 and comes amid increasing inflationary pressures, with core consumer prices rising by 3% in December. BOJ Governor Kazuo Ueda indicated that further rate increases are likely as wage and price growth broadens, although he provided no specific timeline for future hikes.

The BOJ’s inflation forecasts have been revised upward, now projecting headline inflation to hover around 2.5% through March 2026. The central bank noted that many firms are expected to continue raising wages during this year’s annual negotiations, which supports its outlook.

Despite the positive economic signals, Ueda acknowledged uncertainties surrounding global trade policies, particularly those stemming from U.S. President Donald Trump’s administration. He emphasized that clarity on potential tariff increases would be factored into future policy decisions.

Following the announcement, the Japanese yen appreciated briefly before stabilizing, while the two-year Japanese government bond yield rose to levels not seen since October 2008. Market analysts anticipate at least one more rate hike by the end of the year as the BOJ continues to navigate its path away from years of deflation and stagnant growth.

Overall, this move underscores a significant shift in Japan’s monetary policy as it seeks to normalize interest rates after a prolonged period of ultra-loose monetary conditions.