BOJ hikes rates to 30‑year high as inflation stays above 2%

Even so, the BOJ expects corporate profits to remain strong and wage growth to continue into 2026. It also sees rising odds of hitting its long‑term inflation goal.

However, the BOJ forecasts that core inflation will slow to below 2% between April and September 2026 as food inflation cools and government support programs take effect.

Rate hike adds debt strain

The move carries risks for Japan’s financial stability. Bond yields are already at multi‑year highs, increasing borrowing costs for the world’s most indebted major economy. Japan’s debt‑to‑GDP ratio stands near 230%, the highest globally.

A stronger yen could help ease the cost‑of‑living crisis, but recent currency trends have leaned bearish. The yen has traded between 154 and 157 per dollar since November, falling more than 2.5% since Prime Minister Sanae Takaichi took office.

History Of Rate Hikes In Japan

What comes next

Economists expect another rate hike by mid‑2026 that could take policy to 1%. However, forecasts vary widely. BOJ Governor Kazuo Ueda recently said estimating the terminal rate remains difficult. Current projections place it between 1% and 2.5%.

Oxford Economics analyst Shigeto Nagai warned that another hike may cause friction with Takaichi if inflation falls smoothly toward 2% in early 2026. The prime minister previously opposed higher rates, but analysts believe she accepted this move due to yen weakness and mounting cost‑of‑living pressure.

In November, Japan approved a 21.3 trillion yen ($135.5 billion) stimulus plan to support consumers and revive growth. The challenge now shifts to delivering stability, managing inflation, and navigating a slower economy during a rate‑hiking cycle not seen in 30 years.