[December Bank of Japan Meeting] Policy Interest Rate Increased! '3 Key Perspectives' You Should Know to Make the Most of Your Investment Activities
At the Monetary Policy Meeting in December 2025, the Bank of Japan (BOJ) decided to raise the policy interest rate by 0.25%.
Upon seeing the breaking news, many of you might have felt a mix of anxiety and expectation: "Are rates going up again?" or "What will happen to stock prices?"
The market is always changing, but what we investors must do is "understand the mechanism and deal with it calmly."
Based on this decision, I will reorganize the hints for leveraging "Policy Interest Rates" in investment activities from the following three perspectives:
- What is the Policy Interest Rate? (The Basics)
- Why is the Policy Interest Rate Important? (Transmission Routes to the Economy)
- How Does It Affect Financial Markets? (Stocks, Forex, Bonds)
▪What is the Policy Interest Rate?
Simply put, the policy interest rate is the "standard for short-term interest rates set by the central bank to control the economy and prices." It acts as the accelerator and brake to grow the economy stably while stabilizing prices.
• Short-term Interest Rate: Interest rate applied to borrowing and lending funds for less than one year. Controlled by the central bank.
• Long-term Interest Rate: Interest rate determined mainly by market transactions (supply and demand) of "Government Bonds."
Difference Between Japan and the US
You should remember this point, as the target of control differs slightly by country.
• In Japan: The Bank of Japan adjusts the "Uncollateralized Overnight Call Rate." (What is this? It is the interest rate when banks lend and borrow money from each other without collateral, saying "I'm short on cash today" or "I have extra." As the name "Overnight" suggests, it is an ultra-short-term transaction repaid in just one day. By guiding this rate, the BOJ moves the interest rate level of the entire society.)
• In the US: The "Federal Funds Rate (FF Rate)" decided by the FRB (Federal Reserve Board) corresponds to the policy interest rate.
▪Why is the Policy Interest Rate Important?
You might think, "Does the interest rate between banks have anything to do with our lives?" However, this is a very critical number involved in the foundation of the economy. There are four main reasons.
❶ The "Faucet" Adjusting the Flow of Money
The policy interest rate is like a water faucet in the economy.
• Rate Hike (Tightening the Faucet): Interest rates for banks lending to companies and individuals also rise, increasing borrowing costs and reducing consumption and investment.
• Rate Cut (Opening the Faucet): Money becomes easier to borrow, money circulates in the world, and economic activities become active.
❷ Price Stability (Countermeasures for Inflation/Deflation)
Central banks use interest rates to keep the inflation rate at an appropriate target (e.g., 2%). If prices rise too much, they raise rates to cool it down. If the economy stagnates due to deflation, they lower rates to warm it up. This balance adjustment is their greatest mission.
❸ Impact on Exchange Rates
Money has a nature of gathering where "interest rates are high." If Japan's interest rates rise, the attractiveness of holding "Yen" increases, making it prone to appreciation (strong Yen). Conversely, if rates are low, Yen is sold, making it prone to depreciation (weak Yen).
❹ Economic Adjustment Device
It functions as an adjustment valve to cool down an overheating economy (preventing bubbles) or to boost a recession.
▪Impact of Policy Interest Rates on Financial Markets
Now, let's look at the "Impact on the Market," which we investors are most concerned about. The basic theories are as follows:
❶ Impact on Stock Prices
• Rate Hike: Generally, stock prices tend to fall because borrowing costs for companies increase, squeezing profits. (However, if rates are hiked during a booming economy, stock prices may rise due to "earnings expectations.")
• Rate Cut: Stock prices tend to rise as funding becomes easier, which the market welcomes.
❷ Impact on Foreign Exchange (Forex)
• Rate Hike: Increases the currency's appeal, a factor for a Strong Yen.
• Rate Cut: Decreases the currency's appeal, a factor for a Weak Yen. (Currency fluctuations change the performance of import/export companies, which indirectly affects stock prices.)
❸ Impact on the Bond Market Bonds and interest rates have a "Seesaw Relationship."
• Rate Hike: Bond prices Fall.
• Rate Cut: Bond prices Rise.
▪Summary: Leveraging Past Lessons for the Future
A recent example where policy interest rates significantly shook investor psychology and behavior is the "Stock Market Crash of August 5, 2024 (The Reiwa Black Monday)."
• Trigger: Just before, on July 31, the BOJ decided to hike rates to 0.25%, exceeding market expectations (around 0.1%).
• Chain Reaction: This caused rapid "Yen Appreciation" (USD/JPY went from 161 range to 141 range). In addition to concerns about deteriorating performance of export companies, the unwinding of Yen Carry Trades occurred.
• Result: Liquidity dried up, and panic selling ensued. The Nikkei Stock Average recorded a historic crash of 4,451 yen drop in a single day.
As seen here, changes in policy interest rates can sometimes have a dramatic impact on the market.
However, what is important for us long-term investors is not to be frightened by crashes, but to have a scenario: "If interest rates move, what is likely to happen next?" In times of crisis, hints are often scattered in the market.
Let's keep our antennas tuned to the movements of central banks daily, and enjoy market changes with "composure (using about 60-70% of our capacity)."
(Text by Julius)
■Author Profile
About the Author Kenji Kamioka
AFP (Certified by the Japan Association for Financial Planners), Licensed Real Estate Transaction Specialist
President and CEO of Julius Co., Ltd.An investor and strategic media owner with over 10 years of business management experience in three Asian countries: China, Thailand, and Vietnam. While actively managing real estate and financial assets through his own company, he promotes a lifestyle that leverages the structure of capitalism. He has authored numerous books.
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