As the Bank of Japan (BoJ) prepares to meet on December 18-19, markets are bracing themselves for a second consecutive 0.25% rate hike. This move would not only be significant in terms of magnitude – the largest annual increase in 35 years – but also as a signal that the BoJ is committed to an “era of rising interest rates.”

The total annual increase for 2025 is expected to reach about 0.5%, breaking through the long-standing 0.5% ceiling that has capped rates for roughly three decades. This development will have far-reaching implications, particularly in the bond market, where long-term yields have been climbing steadily. The 10-year JGB yield is nearing 2%, a level not seen since 2006, while the 2-year yield has already surpassed 1%.

The BoJ’s communication on its future rate-hike strategy will be a key focus at the December meeting. With current forecasts suggesting around 1% by year-end, attention will shift to 2026 and potential revisions to the neutral rate estimate. A revision could signal more hikes and push forecasts higher, possibly matching 2025’s 0.5% increase.

The BoJ’s decision will not only impact bond markets but also shape market sentiment and influence economic growth. As interest rates rise, it can lead to a stronger yen, which could negatively impact exports and potentially slow down economic expansion. On the other hand, higher interest rates can also attract foreign investors, boosting the stock market and encouraging domestic investment.