On December 19,2025, the Bank of Japan raised its policy rate by 25 basis points, increasing it from 0.5% to 0.75%—the highest level in 30 years. This followed a January rate hike to 0.5%, and the move has sparked market attention on the bank's future policy direction and the trajectory of Japanese government bonds and the yen.

Professor Sun Lijian argues that this interest rate hike represents both a forced normalization and a time-sensitive maneuver, serving as a cautious passive tightening coupled with the starting point of monetary policy normalization. While the conditions for raising rates are barely met, they remain far from solid. Inflation and wage expectations are largely acceptable but lack a solid foundation, economic growth remains weak, and the wage-price cycle is still in its early embryonic stage. The rate hike reflects a comprehensive assessment of both internal and external window periods: externally, it acts before the Federal Reserve shifts to easing; internally, it leverages manageable inflation and wage expectations to lock in future policy options through minor adjustments, leaning more toward normalization than tightening. The 25 basis point increase directly impacts the real economy minimally while exerting greater influence on funding costs, asset valuations, and behavioral expectations. The overall accommodative stance aims to pull Japan's economy back from pathological easing to self-sustaining. The current rate hike is far from sufficient to reverse the established trajectory of the yen and Japanese bonds. The yen's decline stems from the overlap of exhausted positive news and interest rate spread trading, while the surge in Japanese bond yields reflects market concerns about inflation and policy. The Bank of Japan faces a dilemma, with related pressures unlikely to fundamentally ease in the short term.

Translated by Yiqian YANG

Full text in Chinese available at:

https://fddi.fudan.edu.cn/a1/1d/c18965a762141/page.htm