Global Stocks Rally as Bank of Japan Raises Rates to 30-Year High
New York, Saturday, 20 December 2025.
As the Bank of Japan hikes rates to a 30-year high of 0.75%, the yen paradoxically weakened, fueling a tech-led global equity rally amidst shifting monetary policies.
A Historic Shift in Monetary Policy
Global markets closed on a high note this Friday, December 19, driven by a complex interplay of monetary tightening in Asia and bullish sentiment in Western technology sectors. Central to this financial narrative was the Bank of Japan’s (BOJ) decisive move to raise its key short-term interest rate to 0.75% [1][3]. This adjustment, which represents a 50% increase from the previous rate of 0.50%, marks the highest benchmark level the nation has seen since September 1995 [4][2]. While a rate hike typically strengthens a currency, the Japanese yen defied conventional expectations, weakening against the dollar to trade above the 157 level according to some indices [3], while other data points placed it near 155.92 [2]. This counter-intuitive market reaction suggests investors had priced in a more aggressive hawkish stance than Governor Kazuo Ueda delivered.
Deciphering the Decision
The Policy Board’s decision, effective from Monday, December 22, 2025, sets the uncollateralized overnight call rate at 0.75% and the basic loan rate at 1.0% [1]. This move underscores the BOJ’s confidence that Japan is finally escaping its deflationary trap. Inflation has persisted above the central bank’s 2% target for 44 consecutive months, with the Consumer Price Index (CPI) growing by 2.9% in November 2025 [2]. Despite these inflationary pressures, the economy faces headwinds; revised figures indicate a contraction of 0.6% quarter-on-quarter in the third quarter of 2025 [2]. The central bank’s strategy appears to be a delicate balancing act: normalizing rates to curb inflation without stifling a fragile economic recovery characterized by declining real wages [2].
Market Ripple Effects
The immediate impact of the rate hike rippled through asset classes. In Tokyo, the Nikkei 225 stock index climbed 1.28%, buoyed by the weaker yen which traditionally favors Japan’s export-heavy multinationals [2]. Meanwhile, the bond market reacted sharply, with the yield on 10-year Japanese government bonds (JGB) rising approximately 5 basis points to reach 2.019%, a level not seen since 1999 [2]. The divergence between the BOJ’s tightening and the Federal Reserve’s potential easing has kept the yen soft, a dynamic that supports the lucrative “carry trade”—borrowing in yen to invest in higher-yielding assets elsewhere—though analysts warn this trade could unravel if the rate gap narrows significantly [6].
Future Outlook and Global Implications
Looking ahead, the trajectory for Japan’s monetary policy remains cautious. Governor Ueda emphasized that the bank would update its economic views at each meeting, signaling that future hikes are not on a preset course [3]. Market analysts project the next potential hike of 25 basis points could occur in the second half of 2026, as the BOJ waits to verify the sustainability of wage growth [5]. For global investors, the current landscape presents a window of opportunity where accommodative financial conditions in Japan continue to support economic activity, despite the shift away from ultra-loose policy [4]. However, with the yen trading at historically undervalued levels [5], the risk of currency intervention remains a critical variable to watch in the coming weeks.