Bank of Japan Raises Interest Rate to 0.75%, Yen Experiences Sharp Decline

Significant Monetary Policy Shift

The Bank of Japan (BOJ) made a landmark decision on December 19, 2025, by raising its short-term interest rate to 0.75% from the previous 0.5% ²

. This unanimous decision marks the highest interest rate level since the early 1990s, signaling a crucial step in ending Japan's prolonged era of ultra-loose monetary policy and near-zero borrowing costs. The rate hike reflects BOJ's growing confidence in Japan's economic recovery and inflation outlook, particularly wage growth ¹

Source 1

https://internasional.kontan.co.id/news/bank-of-japan-naikkan-suku-bunga-ke-level-tertinggi-30-tahun-yen-justru-melemah

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Market Reaction and Currency Impact

Contrary to expectations, the yen weakened significantly against the US dollar following the rate hike ³

. This unexpected move was driven by BOJ Governor Kazuo Ueda's cautious remarks during the post-decision press conference, where he refrained from providing clear guidance on the timing and pace of future rate increases. The dollar surged as much as 1.2% to a one-month high against the yen, reaching 157.365 ³

Source 3

https://investasi.kontan.co.id/news/yen-jepang-melemah-tajam-usai-kenaikan-suku-bunga-bank-of-japan

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Economic Context and Future Outlook

The BOJ's decision indicates a shift in their economic assessment, showing a more optimistic view on both growth and inflation prospects. This change in stance is crucial as Japan aims to achieve its 2% inflation target sustainably, supported by rising wages. However, the market reaction highlights the complexity of communicating monetary policy changes, particularly when balancing between supporting economic growth and managing currency fluctuations.