Based on the latest market information, the Bank of Japan is very likely to decide on a rate hike at its monetary policy meeting this month (December 2025). This would be the bank’s first rate hike since January this year, and market expectations are high.

🗓️ Key Meetings and Market Expectations

· Meeting dates: December 18-19, 2025
· Expected rate adjustment: Policy rate may be raised from 0.5% to 0.75%
· Market expectation probability: Close to 80% (based on Reuters report from December 4)

📈 Core Reasons Driving the Rate Hike

The main reasons prompting the Bank of Japan to urgently shift toward a rate hike at the end of the year are to control inflation and stabilize the yen.

· Addressing inflation and wage growth
The Bank of Japan considers rising employee wages as a key factor in deciding to raise rates. Governor Kazuo Ueda recently stated that corporate profit levels provide room for wage increases, which forms the basis for a rate hike. In addition, inflation in Japan has consistently exceeded the BOJ’s 2% target, especially as market expectations for future inflation have risen to high levels.
· Easing yen depreciation pressure
The yen has remained weak recently, depreciating more than 4.5% against the US dollar this quarter. Although the BOJ does not target the exchange rate, sharp yen depreciation increases import costs, exacerbating domestic inflation pressure, and has become a major concern for policymakers.
· Removing political obstacles
Previously, the new government’s preference for loose monetary policy was a major obstacle to a rate hike. However, according to the December 4 report, the Japanese government’s attitude has shifted and it may tacitly allow the central bank to raise rates this month.

📊 Potential Market Impact of a Rate Hike

If the Bank of Japan raises rates this month, it is expected to have a significant impact on Japanese financial markets, mainly in the following areas:

Bond Market

· Yields: Upward pressure increases (already evident)
· Note: Market expectations for a rate hike have led to a sell-off of government bonds, with the 10-year JGB yield rising to its highest level since July 2007.

Stock Market

· Stock market: Facing downward pressure
· Note: The market is concerned that a rate hike will increase corporate financing costs, while yen appreciation may erode export company profits. After Kazuo Ueda's speech on December 1, the Nikkei 225 index plunged that day.

Foreign Exchange Market

· Yen exchange rate: May receive short-term support
· Note: A rate hike helps narrow the US-Japan interest rate differential, theoretically supporting the yen. However, with long-term high inflation expectations, the boost to the yen from a rate hike may be limited.

Economic Policy

· Monetary policy: Officially shifts to tightening
· Note: This will be the first rate hike since January this year, marking further progress in normalizing monetary policy. However, Governor Kazuo Ueda emphasized that even after a rate hike, real interest rates will remain at very low levels and financial conditions will stay accommodative.

💎 Summary

In summary, the signal for a rate hike by the Bank of Japan in December is already very clear, mainly to address the dual pressures of domestic inflation and continued yen depreciation. This rate hike will mark another step for Japan in exiting its ultra-loose monetary policy, but the central bank is expected to maintain a relatively accommodative financial environment.