TOKYO, 29 December 2025 — Minutes from the latest Bank of Japan (BOJ) policy meeting signal that although the central bank recently lifted its benchmark interest rate to a 30-year high, real interest rates in Japan remain very low, prompting some policymakers to signal room for further rate increases in 2026. The comments underscore the BOJ’s evolving stance toward normalising monetary policy after decades of ultra-accommodation.
At its 18–19 December policy meeting, the BOJ raised its policy rate from 0.50 per cent to 0.75 per cent, the highest level since the mid-1990s, a continuation of its shift away from the ultra-low interest regime that defined much of the past three decades. However, several board members noted in the official summary that inflation-adjusted (real) borrowing costs remain “very low”, suggesting that the central bank still has room to tighten further if economic conditions warrant.
Drivers Behind the Discussion
The debate reflects a broader reassessment within the BOJ as policymakers respond to sustained inflation above the central bank’s 2 per cent target, a tighter labour market and rising wage pressures, a combination that has emboldened at least some members to argue for further normalisation. With real rates still negative or near zero in the context of persistent price growth, officials have suggested that additional rate hikes could be needed to anchor inflation expectations and align interest rates with a more neutral stance.
One BOJ official in the meeting minutes suggested that periodic rate increases every few months may be appropriate to gradually move policy toward levels where real rates no longer stimulate overly accommodative financial conditions. Another comment linked the weak yen’s pressure on import prices to the fact that policy rates had been too low relative to inflation for too long, arguing that further tightening could help contain inflationary carry-overs from currency depreciation.
Why Real Rates Still Matter
Real interest rates, nominal policy rates adjusted for inflation, are a key measure of how restrictive or stimulative monetary policy actually is. Even after the BOJ’s recent hikes, inflation-adjusted borrowing costs are still seen by many policymakers as insufficiently restrictive, especially given Japan’s long history of ultra-easy policy and structural deflationary pressures. The BOJ’s own actions suggest it is navigating a fine balance between containing inflation and not over-tightening in a still-fragile economic environment.
Market Reactions and Outlook
Financial markets have reacted to the BOJ’s hawkish tilt with higher Japanese government bond yields and a weaker yen, reflecting both expectations of future rate increases and ongoing currency volatility. The central bank’s communication about low real rates and future tightening has reinforced the idea that Japan’s monetary policy trajectory will diverge from past norms, even as other major central banks have pivoted toward easing in 2025.
The Ledger Asia View:
Japan’s latest policy deliberations highlight how the BOJ is struggling to balance inflation control with economic stability after decades of unconventional monetary policy. Signals that real rates remain low deepen expectations that the BOJ may continue hiking rates into 2026, even as global monetary conditions evolve. For policymakers and investors across Asia, Japan’s rate path will be an important factor shaping regional currency markets, capital flows and cross-border investment strategies in the year ahead.
