Bank of Japan hikes benchmark rate to highest level since 1995

Bank of Japan raises interest rate

The Bank of Japan raised interest rates on Friday to levels unseen in three decades, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.

As widely expected, the central bank raised short-term interest rates to 0.75% from 0.5% by a unanimous vote.

BOJ Governor Kazuo Ueda will hold a news conference to explain the decision at 3:30 p.m. (0630 GMT).

The yield on the benchmark 10-year Japanese government bond rose to the highest since May 2006 after the central bank lifted its key policy rate on Friday.

The yield climbed 3.5 basis points to hit the key psychological level of 2%.

The decision to lift rates to 0.75% had been widely anticipated and the knee-jerk reaction was to sell the yen on the fact, while awaiting a more detailed outlook from BOJ Governor Kazuo Ueda's media conference later in the session.

Markets had wagered on only one more hike next year to 1.0%, even though Ueda has suggested a neutral range for rates would extend from 1.0% to as high as 2.5%.

Investors will thus be cautious in case he offers any hint that rates could be hiked more than once in 2026.

"Given that real interest rates remain strongly negative despite today's hike, the BOJ signalled that further tightening was likely," Abhijit Surya, a senior APAC economist at Capital Economics, said.

"Our own view is that the incoming data are more likely than not to surprise to the upside," he added, and saw rates reaching 1.75% by 2027.

Data on Friday showed Japan's core CPI rose at an annual pace of 3.0% in November, unchanged from the previous month.

Asian share markets held Wall Street-driven gains on Friday while the yen eased after the Bank of Japan raised interest rates to a three-decade high and left the door wide open to further tightening.

Japan's Nikkei was up 1.3%, having tracked an overnight rally on Wall Street. South Korea rose 0.8% and tech-heavy Taiwan TWSE:TAIEX 1.3% encouraged by stellar results from chipmaker Micron Technology.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.7%, while Chinese blue chips gained 0.6%.