Bank of Japan set to raise rates amid sticky inflationary pressures

The Bank of Japan is expected to raise its key policy rate by 25 basis points to 0.75% when it meets on 19 December, 2025.

Sticky inflation underpins the case for tightening as growth falters

Japan’s core CPI has recently risen to 3% year-on-year, remaining stubbornly above the BoJ’s 2% target and showing little sign of moderating. By the central bank’s own assessment, monetary policy remains highly accommodative in real terms, with real interest rates still deeply negative.

(Source: Trading Economics)

Inflation risks are also expected to intensify in 2026, driven by a shift toward more expansionary fiscal policy under the new Sanae Takeichi government. The administration has flagged significant deficit spending focused on strategically important industries and defence, including efforts to strengthen domestic manufacturing capacity in areas such as artificial intelligence and semiconductors.

The re-orientation of fiscal policy reflects both economic and geopolitical priorities, including reducing reliance on foreign supply chains and reinforcing Japan’s security posture in response to regional tensions with China. These initiatives are likely to add to domestic demand and reinforce upward pressure on prices over the medium term.

The expected rate hike comes despite recent GDP data that fell short of expectations. Annualised growth contracted by 2.3%, largely reflecting a pullback in exports following a pre-tariff surge earlier in the year ahead of US trade measures.

(Source: Trading Economics)

Economic activity was also weighed down by softer capital expenditure and subdued household spending. However, policymakers appear willing to look through the near-term weakness, viewing it as transitory rather than indicative of a sustained downturn.

With inflation risks skewed to the upside and financial conditions still loose, the BoJ appears comfortable tightening policy even as growth momentum falters. The markets are ascribing a 90% chance of a hike at this meeting.

Markets look to BOJ guidance and Yen looks primed to rise

There are no updated economic forecasts accompanying this policy meeting, placing greater emphasis on the post-decision press conference from BoJ Governor Kazuo Ueda. Markets will be closely watching for guidance on the pace and timing of any further policy adjustments. Interest rate markets are currently pricing in the possibility of another rate move in 2026 that would lift Japan’s policy rate toward 1%. Whether those expectations are validated is likely to depend on how firmly the BoJ signals its commitment to containing inflation.

A hike and hawkish guidance from the BOJ could support a recovery in the Japanese Yen, which has been weakened by the central bank’s slow response to inflationary risks and expectations of significant fiscal stimulus next year. Such a dynamic would support the recent rise in the Yen due to US rate cuts amid moderating inflation and rising joblessness in the States.

The USD/JPY remains in an uptrend, although the momentum is slowing. The pair is primed for a pullback, given the fundamentals. However, the charts continue to look bullish, carving out what looks like a continuation pattern. Resistance appears to be around a downward sloping trendline, a break of which may signal a continued uptrend. Meanwhile, support appears to be around a confluence of levels, including the 50-day moving average, around 154.30/40. A break of that level could signal a trend reversal.

(Source: Trading View)
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