Japan stocks and bond yields jump after central bank hikes policy rate to highest in decades

By Admin

19 Dec, 2025

Introduction
Japanese financial markets reacted sharply after the Bank of Japan (BOJ) raised its policy rate to the highest level seen in nearly 30 years. The move marks a significant shift in Japan’s long-standing ultra-loose monetary policy as inflation remains persistently above target. The decision had a ripple effect across equities, bonds, currencies, and broader Asian markets.

Bank of Japan’s landmark rate hike
The Bank of Japan increased its benchmark interest rate by 25 basis points to 0.75%, the highest level since 1995. The hike was widely expected, aligning with forecasts from economists surveyed by Reuters. This policy adjustment reflects the central bank’s response to sustained inflationary pressures that have remained above target for almost four years.

Latest inflation data supports policy shift
Government data released on Friday showed Japan’s consumer inflation eased slightly to 2.9% in November. However, core inflation, which excludes fresh food prices, remained steady at 3%, matching economists’ expectations. While inflation has moderated marginally, it continues to sit above the BOJ’s comfort zone, reinforcing the case for tighter monetary conditions.

Market reaction: equities, bonds, and yen
Japanese equities posted strong gains following the announcement. The Nikkei 225 advanced 1.33%, while the broader Topix index rose 1.06%. Bond markets also reacted swiftly, with yields on the 10-year Japanese government bond climbing over 3 basis points to 2%, the highest level since May 2006. The 20-year bond yield increased more than 2 basis points to 2.962%.

In the currency market, the Japanese yen weakened by 0.33% to 156.06 against the U.S. dollar. According to Ken Matsumoto, Japan macro strategist at Credit Agricole-CIB, the government’s acceptance of higher interest rates appears driven by concerns within the Ministry of Finance over continued yen depreciation. He added that if the yen weakens sharply during the low-liquidity year-end and New Year holiday period, authorities may actively intervene in the foreign exchange market.

Broader Asian market performance
The positive sentiment extended across Asia. South Korea’s Kospi rose 0.77%, while the small-cap Kosdaq surged 1.49%. Australia’s S&P/ASX 200 gained around 0.5%. Hong Kong’s Hang Seng index climbed close to 0.6%, and mainland China’s CSI 300 advanced 0.58%. In India, the Nifty 50 added about 0.5%, supported by strong investor interest, including the trading debut of ICICI Prudential AMC, which jumped as much as 20% after its ₹106 billion IPO.

Global cues from Wall Street
Overnight cues from the United States also supported market sentiment. The S&P 500 snapped a four-day losing streak, rising 0.79% after softer-than-expected inflation data boosted optimism for potential interest rate cuts in 2026. The Nasdaq Composite surged 1.38%, driven by strong guidance from chipmaker Micron Technology, while the Dow Jones Industrial Average edged up 0.14%.

Conclusion
The Bank of Japan’s rate hike marks a historic turning point for the country’s monetary policy and signals growing confidence in managing inflation. While Japanese equities and bond yields have responded positively, currency movements and potential government intervention remain key factors to watch. As global markets digest shifting interest rate expectations, Japan’s policy normalization is set to play a critical role in shaping regional and global financial trends.