Markets on Alert as BoJ Governor Hints at More Rate Hikes

Quick overview

The head of Japan’s central bank said monetary policy will continue to tighten in line with economic improvement and inflation.

The benchmark rate has already reached 0.75%, its highest level since 1995, while a weak yen continues to fuel price pressures.

Bank of Japan (BoJ) Governor Kazuo Ueda reaffirmed his strategy of continuing the interest-rate hiking cycle during his first public appearance of the year before private-sector bankers. The stance puts him at odds with Prime Minister Sanae Takaichi, who is pushing for fiscal stimulus to revive Japan’s economy.

“We will continue raising interest rates in line with improvements in the economy and inflation,” Ueda said on Monday at the New Year conference organized by the Japanese Bankers Association. He added that “appropriately adjusting monetary easing will lead to the achievement of stable inflation and long-term economic growth.”

Japan’s economy experienced a moderate recovery last year despite the hit to corporate profits caused by higher U.S. tariffs, Ueda noted. He added that “it is highly likely that wages and prices will continue to rise together at a moderate pace.”

Speaking to the same banking audience, Finance Minister Satsuki Katayama said Japan is at a critical stage of transition toward a growth-driven economy, after years mired in deflation. Less than a month ago, the Takaichi administration announced its largest stimulus package since the Covid-19 pandemic, totaling $112 billion.

Next steps and currency pressure

On December 19, the Bank of Japan raised its benchmark interest rate to 0.75%, the highest level since 1995. Most analysts expect the next rate move to take place around mid-2026, although some warn it could come sooner due to the yen’s weakness.

The Japanese currency was trading around 157.15 per dollar by midday in Tokyo on Monday, after touching 157.25, its weakest level in two weeks. Traders believe the currency’s proximity to the critical threshold of 160 per dollar played a key role in last month’s rate decision.

A weak yen intensifies inflationary pressures through higher import costs. Japanese households have been feeling the squeeze, as the core inflation measure has remained at or above the 2% target for more than three and a half years, eroding purchasing power.

The BoJ’s next monetary policy decision is scheduled for January 23.

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Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.

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