The Bank of Japan began its final policy meeting of 2025 on Thursday, with markets pricing an 86% probability that it will raise benchmark interest rates to 0.75%—the highest level in approximately 30 years. The decision, expected Friday, could send ripples through global currency and equity markets.

What's Expected

The BOJ is widely expected to raise its policy rate by 25 basis points, from 0.50% to 0.75%. That may sound trivial by American standards, but for Japan—which has maintained near-zero or negative rates for most of the past three decades—it represents a historic shift.

The last time Japanese rates exceeded 0.5% was September 1995. Bill Clinton was president, the internet was dial-up, and Amazon had just gone online.

Why Japan Is Hiking

Governor Kazuo Ueda has signaled that conditions for a rate increase are forming. Inflation has run above the BOJ's 2% target for 43 consecutive months—an extraordinary streak for a country that fought deflation for decades. While Japan's economy contracted 0.6% in Q3, Ueda noted that U.S. tariff impacts have been "less than feared."

The BOJ is also watching the yen. A weak currency imports inflation through higher energy and import costs. Raising rates should strengthen the yen, providing relief to Japanese consumers.

The Carry Trade Risk

Global investors should pay close attention. For years, the "yen carry trade" has been a popular strategy: borrow cheaply in yen, invest in higher-yielding assets elsewhere. That trade works beautifully when Japanese rates stay near zero.

As Japanese rates rise, the carry trade becomes less attractive. Capital may flow back to Japan, creating selling pressure on assets worldwide—including U.S. stocks, bonds, and cryptocurrencies. Previous BOJ moves have triggered sharp selloffs in risk assets.

Japan as Global Creditor

Japan is the largest foreign holder of U.S. Treasury debt. When Japanese interest rates rise, domestic bonds become relatively more attractive to Japanese investors. Any shift in Treasury demand could affect U.S. borrowing costs and the dollar.

What Markets Are Watching

With a rate hike largely priced in, attention will focus on the BOJ's commentary:

  • Neutral rate guidance: How high does the BOJ ultimately want to go?
  • Yen commentary: Will they signal concern about currency weakness?
  • Future hike timing: Markets expect another increase in mid-2026

Timing Considerations

The decision comes Friday morning Tokyo time—Thursday night in New York. U.S. markets will be closed when the announcement hits, but futures and Asian markets will react immediately. Friday's U.S. trading session could see significant volatility.

The Bottom Line

The BOJ's rate decision is more than a Japanese story—it's a global macro event. Higher Japanese rates could strengthen the yen, pressure the carry trade, and create volatility in risk assets worldwide. For American investors, the message is clear: what happens in Tokyo doesn't stay in Tokyo.