Japan’s long exit from ultra-low interest rates moved closer to another turning point as former Bank of Japan officials and market participants increasingly expected a rate increase by late 2025 or early 2026. The debate reflected Japan’s unusual challenge: inflation had finally returned, but policymakers still wanted to avoid choking off wage growth and domestic demand.
The shift
Former BOJ executive Eiji Maeda argued that another rate increase could come as early as December or January. The central bank’s policy rate was still only 0.5%, but a weak yen, rising urban property prices, and persistent inflation were strengthening the case for gradual normalization. At the same time, corporate investment and wage plans remained more resilient than many officials had feared after U.S. tariff changes.
What is driving it
For decades, Japan’s economy was defined by weak inflation and extremely low interest rates. Normalization reverses that structure. Higher rates can support the yen and restrain speculative borrowing, but they also raise financing costs for households, companies, and a heavily indebted government. The BOJ therefore has to move slowly enough to preserve growth while moving fast enough to keep inflation expectations anchored.
Outlook
Japan matters globally because years of low Japanese yields encouraged investors to send capital abroad. As domestic yields rise, some funds may become more attractive at home, potentially affecting global bond markets and the yen-funded carry trade. Even small changes in Japanese policy can therefore have consequences well beyond Tokyo.
The outlook now hinges on wages, services inflation, the exchange rate, and household consumption. If wages keep rising and firms continue passing higher labor costs into prices, the BOJ will have a stronger case for further hikes. If domestic spending weakens sharply, policymakers may choose a slower path even if headline inflation stays above target.