Japan Interest rates at historic high of 0.75%; How could this impact the world economy?

Synopsis: Bank of Japan has raised its main interest rate by 0.25 percent to around 0.75 percent, which is the highest level in 30 years. This move aims to curb inflation but risks increasing government borrowing costs.

Japan has struggled with low inflation and repeated deflation since the 1990s, this started after the collapse of its asset price bubble which led to weak growth and demand, and resulted in what is widely known as- The Lost Decades of Japan.

Therefore in order to revive the economy, the Bank of Japan had adopted zero interest rate which was later changed to a negative number, which kept the borrowing cost near zero levels for years. This policy was maintained even as the U.S. and Europe had raised their rates post the COVID pandemic. and this is what makes Japan’s recent rate hike a significant shift.

In a landmark move that marks a significant pivot in global monetary policy, the Bank of Japan (BoJ) raised its benchmark interest rate by 0.25 percentage, to 0.75 percent, which is the highest level in 30 years. This decision was announced on December 19, 2025, and comes as part of Japan’s ongoing efforts to normalise its policy after decades of ultra low and negative interest rates. 

Why the BoJ Raised Rates Now?

This BoJ’s decision reflects upon the rising confidence that inflation, which currently hovered above its 2 percent target, has become more entrenched, helped by wage growth and a weaker yen that has lifted import related prices. The markets have widely anticipated this move, and the unanimous decision signals a strategic shift away from years of accommodative monetary policy.

Despite the historic rate increase, the bank officials have emphasised that the real interest rates remain negative, and the country’s financial conditions are still supportive of economic activity, and added that there are still chances for further rate increases if inflation and economic indicators continue to align with their projections. 

Soon after the news of the increased interest rate was out, the Japanese Yen value dropped from 155yen / US Dollar to 157 yen / US Dollar, and is currently also being exchanged around 157yen / US dollar.

How Market Reactions and Global Impacts

The rate hike had immediate effects on financial markets worldwide, one such being the already mentioned fall in yen value, and another point is that Japanese government bond yields jumped to a multi-year high of  2.09 percent. The Asian equity markets, including the Nikkei 225, responded positively, with gains seen across several indexes. 

Globally, this decision can influence capital flows and bond markets. Japan has long been a source of low-cost capital, and rising interest rates could encourage investors to shift funds back, affecting liquidity conditions elsewhere. Some analysts also suggest that rising yields in Japan could ripple into global bond markets, potentially affecting borrowing costs and risk asset valuations. 

Could This Affect the World Economy?

Though Japan’s 0.75 percent policy rate remains low compared to interest rates in the U.S. and Europe, it marks a symbolic end to the country’s prolonged era of ultra-low interest rates. This shift signals a structural change in Japan’s monetary policy, which for decades allowed cheap yen funding and supported global capital movements. But now with higher Japanese bond yields, this could bring a gradual normalization that could reshape investor behavior and alter cross-border investment dynamics.

The rising yields in Japan may lead to an unwinding of the long-standing yen carry trade, where investors borrow in yen at low costs to invest in higher-yielding global assets.

As yen funding becomes more expensive, global liquidity could tighten, pushing up risk premiums and increasing market volatility. Emerging markets may face higher borrowing costs, and currency pressure, as investors reassess exposure amid changing global financial conditions driven by Japan’s policy shift.

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