Japan has raised its benchmark interest rate to a 30-year high

The Bank of Japan raised its key interest rate by 0.25 percentage points to around 0.75%, the highest in three decades. This was reported by Financial Times. The yield on the country's benchmark government bonds reached its highest level since 1999 after the decision to raise short-term interest rates.

The rate hike, a unanimous decision by the bank's Policy Board, was the fourth under Governor Kazuo Ueda. It is a continuation of the "normalization" of monetary policy that began last year.

The figure is the highest since 1995, as Japan recovers from decades of ultra-loose monetary policy aimed at combating deflation.

Despite the prospect of further rate hikes, the yen weakened against the dollar after the Bank of Japan's decision. Traders attributed this to market concerns about Japan's fiscal situation under Prime Minister Sanae Takaichi, who took office in October and proposed large-scale spending plans.

At a press conference, Ueda said that the new interest rate of 0.75% is still "far from the lower bound" of the central bank's estimated range for a "neutral rate" – a level at which monetary policy is neither expansionary nor restrictive.

"Our estimate for Japan's neutral rate is in a fairly wide range. It's difficult to pinpoint an exact figure. We'd like to see how the economy and prices react to each change in the short-term rate," Ueda explained.

Hiroshi Shiraishi, a senior economist at BNP Paribas in Tokyo, noted that Ueda tried to maintain a balance in his statements.

"In fact, he didn't say anything new: he didn't want to appear too hawkish and upset the government, or appear too dovish and cause the yen to fall, so the market reaction is exactly as expected," said Shiraishi.

The Bank of Japan's statement notes that labor market conditions in the country with a shrinking population remain challenging, while corporate profits are expected to remain high despite the impact of tariff policies.

The central bank said that companies are "very likely" to continue raising wages next year, and prices will continue to rise moderately.

The Bank of Japan stated that after adjusting the policy rate, real interest rates are likely to remain significantly negative, and accommodative financial conditions will continue to actively support economic activity.

• Overall consumer inflation in Japan has exceeded the Bank of Japan's 2% target for more than three years, driven by the weak yen and the country's high dependence on food and energy imports.