Why Is Japan Considering Interest Rate Hikes in 2025?

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Japan’s central bank is hinting that higher interest rates could be on the horizon, showing a cautious shift.

According to a report from Reuters, Deputy Governor Shinichi Uchida told a Friday credit union meeting that the central bank will continue raising rates if economic and price trends align with its forecasts.

Uchida emphasized that the bank is taking a careful, data-focused approach to policymaking.

His remarks follow earlier statements highlighting an improving business climate in Japan, even as U.S. tariffs continue to pressure exports.

Governor Ueda Calls for Better Decision Making 

Uchida’s remarks echoed those of Governor Kazuo Ueda on Thursday. Ueda said the BoJ will carefully review multiple data points before deciding on an October rate hike. He said that it’s important to carefully watch how these changes could impact Japan’s economy, prices, and financial and foreign exchange markets.

The End of Ultra-Loose Policy

The Bank of Japan is stepping back from the era of ultra-loose monetary policy. The ultra loose policy meant keeping interest rates near zero or negative and buying massive amounts of bonds and ETFs to inject liquidity into the economy.

The BoJ ended its decade-long stimulus program last year as the BoJ raised rates to 0.5% in January, aiming to cement its 2% inflation target.

Even though inflation has stayed above 2% for more than three years, Ueda has urged caution in raising borrowing costs, stressing that price growth should be supported by wage gains and strong domestic demand.

Two board members pushed for higher rates in September, sparking talk of an October hike, but those hopes eased after Sanae Takaichi’s surprise win on October 4. Analysts widely expect the BOJ to reach 0.75% by January, although timing remains uncertain.

In Q3, its balance sheet fell $148 billion to $4.62 trillion, the steepest quarterly drop since 2024. Since March 2024, assets have declined $407 billion, or 8.1%. 

Even with this pullback, Japan’s central bank remains massive relative to the size of the economy as its total assets still account for over 110% of GDP. BoJ announced in late September that it would start gradually offloading its ETF and REIT holdings, targeting a pace of $4.2 billion per year.

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Tackling The Inflation Problem

The BoJ’s slow rate increases have kept the yen weak, raising import costs and adding to inflation pressures.

U.S. Treasury Secretary Scott Bessent said on Wednesday that the yen will settle naturally if the Bank of Japan sticks to “proper monetary policy.”

Previously, he had said that the Japanese have an inflation problem and need to raise rates to get it under control. But Ueda had argued there was no rush to hike rates, citing core inflation still below 2%. 

Rate Hike Debate Ahead of October Meeting

The IMF has also urged the Bank of Japan to raise rates very gradually amid global trade uncertainty.

The BoJ is scheduled to hold its next policy meeting on October 29-30, with additional meetings planned for December and January. Board member Naoki Tamura has pushed for a rate hike to address rising inflation and move closer to a neutral stance, warning that delays could harm the economy.

Investors and market watchers will be closely watching the October meeting for clues on how aggressively the BoJ may tighten policy.

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