On December 25, 2025, the Bank of Japan's (BoJ) Governor, Kazuo Ueda, explained why the central bank raised interest rates for the first time in nearly a year. The bank's goal is to nurture a virtuous economic cycle that lifts both wages and prices permanently.
🔍 The Reason for the Rate Hike: Confidence in a Stronger Economy
The BoJ decided to raise the policy interest rate from 0.5% to about 0.75% because key concerns have started to fade:
U.S. Risks Are Less Severe: While U.S. tariff policies still pose some risk, their negative impact on the U.S. and Japanese economies has been more contained than feared. Corporate profit forecasts in Japan have even been revised upward.
The Wage Boom is Continuing: The BoJ sees strong evidence from businesses and labor unions that the high wage increases seen this year will continue into 2026. With a tight labor market, the bank judges that the “wage-price rise mechanism” is solid.
🎯 The Big Picture Goal: Escaping "Zero Norm" for Good
Governor Ueda outlined a clear long-term vision for Japan’s economy:
The Target: A sustainable cycle where corporate profits lead to higher business investment and wages, which boosts consumer spending, leading to moderate price rises and further profit growth.
The Stakes: The BoJ wants to permanently escape the decades-old "zero norm," where prices and wages hardly moved. It believes achieving its 2% price stability target through this cycle is the foundation for long-term economic health.
The Outlook: Governor Ueda confirmed that if the economy progresses as expected, further interest rate increases will continue to gently reduce monetary support.
📈 How Close is Japan to This Goal?
The speech presented data suggesting Japan is on the path to its target but must keep pushing forward:
📈 Progress Made ✅
Corporate Profits: Have approximately doubled over the past decade.
Wage Growth: Wages, which were stagnant for years, are now under strong upward pressure, with high growth observed recently across a broad range of firm sizes and regions.
Inflation Trend: Underlying consumer price inflation (excluding temporary factors) is on a moderate uptrend and steadily approaching the 2% target.
Economic Shift: The likelihood of Japan's economy returning to a "zero norm" (where wages and prices hardly change) has decreased considerably.
🚀 Challenges & Next Steps
Investment Lag: Growth in personnel expenses (wages) and business fixed investment has remained moderate relative to the substantial increase in corporate profits.
Labor Share Decline: The ratio of personnel expenses to the total value added by firms (the labor share) continues on a moderate declining trend.
Call to Action: For long-term growth, it is more necessary than ever for firms to proactively invest in people and carry out business fixed investment with an eye to the future.
These points show the Bank of Japan's view that the economy is on the right path but requires continued corporate investment to secure a sustainable future.
In summary, the BoJ’s rate hike is a step of cautious optimism. It signals a belief that Japan’s economy is finally transitioning to a new, healthier phase where steady wage and price growth become the norm, paving the way for sustainable long-term prosperity.
