Bank of Japan's Policy Path: Gradual Rate Hikes Continue Despite Persistent Negative Real Rates

The Bank of Japan’s December 29 meeting discussions reveal a critical stance on monetary normalization. According to the central bank’s session records, officials remain committed to lifting the policy rate incrementally over an extended period, emphasizing a measured approach rather than aggressive tightening.

Measured Tightening Cycle Ahead

Japan central bank policymakers outlined a strategy to raise rates at intervals of several months apart. This measured timeline reflects concerns about the domestic economy’s sensitivity to rapid policy shifts. Even after lifting the benchmark rate to 0.75%, the institution recognizes that real interest rates—adjusted for inflation—will continue languishing in deeply negative territory, a reflection of Japan’s persistent deflationary pressures.

The Real Rate Challenge

The disconnect between nominal and real rates highlights a fundamental challenge facing Japan’s monetary authorities. While the policy rate nudges higher, inflation expectations remain subdued, meaning households and businesses still benefit from exceptionally cheap borrowing costs in real terms. This dynamic shapes the Bank of Japan’s deliberate approach, as officials balance the need for gradual normalization against the risk of shocking a fragile economic backdrop.

The consensus within Japan central bank leadership suggests policymakers are comfortable with a drawn-out tightening cycle, prioritizing stability and predictability as they navigate the complex task of unwinding years of ultra-loose monetary accommodation.