Financial markets worldwide are preparing for potential turbulence as the Bank of Japan concludes its final policy meeting of the year with expectations of implementing its first significant interest rate increase in decades. Analysts project the central bank will raise its benchmark rate by 0.25 percentage points to 0.75%, marking the highest level since September 1995 and representing a dramatic shift from Japan’s long-standing ultra-loose monetary policy.
This anticipated move comes despite Japan’s economy contracting at a 2.3% annual rate in the most recent quarter, contrasting sharply with other major economies where central banks have begun cutting rates after previous hikes to combat inflation. The BOJ’s potential decision reflects mounting concerns about entrenched inflation pressures and improved business sentiment, signaling a fundamental policy normalization after years of negative or near-zero rates designed to combat deflation.
The Japanese yen’s significant depreciation against the U.S. dollar—currently trading near 156 yen to the dollar, nearly double its 2012 value—has accelerated imported inflation, particularly for essential goods like food and fuel. This currency weakness, combined with strong global demand for dollar-denominated AI-related investments, has created sustained price pressures that now outweigh the BOJ’s traditional deflation concerns.
Market analysts warn that even this modest rate increase could disrupt the popular ‘carry trade’ strategy, where investors borrow cheap yen to invest in higher-yielding assets abroad. Such disruption could trigger cascading effects across global markets, including cryptocurrencies, as witnessed recently when bitcoin prices dropped below $86,000 on rate hike speculation.
BOJ Governor Kazuo Ueda faces the delicate challenge of timing further normalization while supporting economic growth, with market participants closely monitoring his Friday remarks for clues about future rate trajectory. The central bank’s shift represents a historic departure from the ‘big bazooka’ easing policies initiated in 2013 and underscores Japan’s ongoing struggle to balance inflation containment with sustainable economic expansion amid demographic challenges.