The Bank of Japan’s Monetary Policy Meeting is ongoing, with the decision announcement scheduled for Friday, December 19. Economists and analysts overwhelmingly expect a 25 basis point rate hike, raising the policy rate from the current 0.5% to 0.75%.
This would mark the highest level for Japan’s short-term policy rate in approximately 30 years since September 1995. The Japan Times, and Nikkei report near-unanimous consensus e.g., all 50 economists in a Bloomberg survey and 90% in a Reuters poll predict the hike.
BOJ Governor Kazuo Ueda has signaled consideration of the “pros and cons” of a hike, with markets nearly fully pricing it in. The move comes amid persistent inflation above the 2% target, strong wage growth expectations, and efforts to normalize policy after decades of ultra-low/negative rates.
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While the final outcome isn’t confirmed until tomorrow, a surprise hold would go against broad consensus. The focus will also be on forward guidance for 2026 hikes. The Bank of Japan (BOJ) conducts monetary policy under the Bank of Japan Act, which mandates it to achieve price stability as the foundation for sustainable economic growth.
Price stability allows households and firms to make rational decisions on spending, investment, and resource allocation without disruptions from excessive inflation or deflation. The 2% Inflation TargetIn January 2013, the BOJ explicitly set its “price stability target” at 2% year-on-year increase in the Consumer Price Index (CPI, all items).
This marked a shift to a formal inflation targeting framework, introduced under the Quantitative and Qualitative Monetary Easing (QQE) program launched in April 2013 as part of “Abenomics”, the economic policies of then-Prime Minister Shinzo Abe.
The target is measured primarily by headline CPI including energy and food prices, though the BOJ closely monitors core CPI excluding fresh food and core-core CPI excluding food and energy for underlying trends. The BOJ committed to achieving this target “at the earliest possible time” and has maintained it ever since.
It was accompanied by a joint statement with the government on overcoming deflation. Prior to 2013, the BOJ had a looser “understanding” of price stability around 0–2%, with a midpoint often around 1% from 2006, but avoided strict inflation targeting amid prolonged deflation.
Like many central banks e.g., the Federal Reserve, ECB, the BOJ views 2% as a level that:Provides a buffer against deflation which Japan experienced for decades. Allows room for nominal interest rates to fall in recessions without hitting the zero lower bound. Supports moderate wage growth and economic vitality.
The BOJ uses various tools to influence inflation expectations and economic activity: Interest rate policy— short-term policy rate, currently around 0.5% as of late 2025. Yield curve control previously targeting 10-year JGB yields.
Asset purchases (JGBs, ETFs, etc.). Forward guidance on keeping accommodation until the target is sustainably achieved. The BOJ emphasizes achieving 2% in a stable and sustainable manner, accompanied by wage growth and anchored inflation expectations, rather than temporary spikes from import costs or energy prices.
Japan’s headline and core inflation has exceeded 2% for over three years driven initially by post-COVID recovery, yen weakness, and global commodity prices. Underlying trend inflation is gradually approaching 2%, supported by strong wage negotiations and a tightening labor market.
The BOJ assesses that the likelihood of sustainably achieving the target is increasing, leading to gradual policy normalization ending negative rates in 2024 and modest hikes. However, it remains cautious, monitoring risks like consumption weakness or external shocks, and projects inflation to stay around or above 2% in coming years while continuing accommodative conditions as needed.
The BOJ’s inflation targeting is a cornerstone of its post-2013 framework to escape deflation, with the 2% goal designed for long-term economic health rather than short-term fluctuations.