At its Monetary Policy Meeting on January 22-23, 2026, the Bank of Japan held its policy rate at 0.75%. It had raised rates to a roughly 30-year high only weeks earlier, in December 2025, and wanted to see what that did. The yen kept sliding anyway, and by June the BOJ had gone to 1.0%.

This piece takes the January meeting as its anchor and follows what happened around it: an unusual situation in which raising rates did nothing to stop the currency falling.

The December 2025 Rate Hike: Reaching the Highest Level Since 1995

Background of the Decision

At its December 18-19, 2025 meeting, the BOJ unanimously decided to raise the policy rate by 0.25 percentage points from 0.5% to 0.75%. This marked the highest policy rate since 1995, a full 30 years.

The rate hike was driven by several factors:

  • Continued wage growth outlook: Business surveys heading into the 2026 spring wage negotiations indicated expectations for continued robust wage increases
  • Improving underlying inflation: Core consumer price inflation has been running above the 2% target
  • Responding to yen weakness: The yen trading in the 155-158 range against the dollar has been adding inflationary pressure through higher import costs

Yen Weakness Persists Despite Rate Hike

Remarkably, the yen actually weakened following the rate decision. While higher interest rates typically strengthen a currency, the USD/JPY exchange rate moved to the upper 157 range after the December 19 announcement.

Market analysts point to several factors explaining this "paradox":

  • Persistent U.S.-Japan interest rate differential: Even at 0.75%, Japan's rates remain far below U.S. rates (approximately 3.75%)
  • Deeply negative real interest rates: After accounting for inflation, Japan's real interest rate remains significantly negative
  • Dovish remarks from Governor Ueda: His comment that "there is no predetermined path for future rate hikes" was interpreted as cautious
  • Fiscal expansion concerns: Prime Minister Sanae Takaichi's large budget plans are seen as adding yen-selling pressure

January 2026 Meeting Outlook: Status Quo Expected

The Decision

The January meeting held at 0.75%, as most had expected. It was not unanimous. Of the nine board members, eight voted in favour and one against: Takata Hajime argued that the price stability target had broadly been met and that upside risk to domestic prices was high, and proposed going to 1.0%. He was voted down.

The reasoning behind the hold:

  • The December hike was recent and the BOJ wanted to see its effects
  • External uncertainties, including U.S. tariff policy, persisted
  • The BOJ wanted the results of the 2026 spring wage negotiations first

Outlook Report and Press Conference

The quarterly Outlook for Economic Activity and Prices, published alongside the decision, revised both real GDP and consumer price forecasts upward, a hawkish read. The previous assessment that risks to the fiscal 2026 economic outlook were skewed to the downside was dropped.

The press conference landed dovish anyway. Governor Kazuo Ueda repeated the standing line, that the BOJ would keep raising rates and adjusting the degree of easing as the economy and prices improved, while declining to commit on timing: the path and the pace, he said, depend on conditions. The yen weakened while he was speaking. Talk followed that Japanese and U.S. authorities had run a rate check, the step that usually precedes intervention.

Then June, and 1.0%

On June 15-16, 2026, the BOJ raised the policy rate to 1.0%. It was the first hike in four meetings, since December 2025, and the first time the rate has had a "1" in front of it since 1995, 31 years ago. The trigger was the risk that higher oil prices, driven by tension in the Middle East, would feed through into inflation.

The meeting itself was unusual. Ueda was absent, in hospital for treatment of an infection; Deputy Governor Himino chaired, and Deputy Governor Uchida handled the press conference. With the governor out, the vote ran among the remaining eight members: seven for, one against. Asada Toichiro, appointed in April on the nomination of the Takaichi government, wanted to hold, arguing that downside risk to output and employment outweighed upside risk to prices.

The BOJ also decided to stop tapering its government bond purchases from April 2027, holding at roughly ¥2 trillion a month thereafter. Worth noting: the nominal neutral rate range the BOJ published in March 2026 was 1.1% to 2.5%. At 1.0%, policy has not reached it.

Impact on Households: Mortgage Rates on the Rise

Variable Rate Mortgages

Variable rates track the policy rate through the short-term prime rate. Most lenders review their benchmark rates in April and October, so the December hike feeds into variable rates from April 2026 and starts showing up in monthly payments around July. The June move to 1.0% goes onto the following revision.

Specific calculations show:

  • 45 million yen loan: Cumulative rate increases since July 2024 (totaling 0.75%) result in approximately ¥14,000 higher monthly payments
  • 50 million yen loan: If rates rise from 0.75% to 1%, monthly payments increase by approximately ¥6,000

Fixed Rate Mortgages

Fixed rates are tied to long-term interest rate movements. The 10-year Japanese Government Bond yield temporarily reached the 2% level in December 2025, the highest in approximately 26 years. The representative fixed-rate mortgage product "Flat 35" has risen above the 2% threshold in January 2026.

How Long Will Yen Weakness Continue?

Conditions for Yen Recovery

Economists cite the following conditions for yen weakness to subside:

  1. U.S. rate cuts: Continued Federal Reserve rate cuts narrowing the U.S.-Japan interest rate differential
  2. Steady BOJ rate hikes: Gradual increases bringing the policy rate above 1%
  3. Restored confidence in fiscal discipline: Eased market concerns about government fiscal management

Nomura Securities forecast USD/JPY at 140 by the end of 2026 as of the start of the year, on the assumption that the rate gap narrows. If fiscal concerns linger, the effect of rate hikes gets offset. In the event, the yen stayed weak after the June move to 1.0%, and economists have pointed to the possibility of it running past 160 to the dollar.

Possibility of Currency Intervention

Vice Minister for International Affairs Atsushi Mimura has expressed vigilance about recent yen movements, describing them as "one-sided and sharp." As levels approach 160 yen per dollar, currency intervention similar to that seen in summer 2024 becomes a possibility.

International Perspective: Impact on the Global "Carry Trade"

Japan's rate increases have implications for global financial markets. Japan has long served as the funding currency for "carry trades," where investors borrow in low-yielding yen to invest in higher-yielding dollar assets.

If the BOJ continues raising rates, an unwinding of these carry trades could cause temporary disruption in global equity markets and risk assets. In August 2024, expectations of BOJ tightening triggered a global stock selloff.

Adapting to a "World with Interest Rates"

The policy rate is back at 1.0%. That the yen keeps falling anyway points at something monetary policy alone does not fix.

What matters from here is whether wage growth catches up with prices, and whether real wages turn positive. That is what decides household purchasing power, and it is what the BOJ will be reading.

How does your country's central bank balance inflation control with economic stimulus? What discussions are happening about interest rate policies where you live? Share your thoughts in the comments!

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