After more than three decades of keeping interest rates near zero, Japan has finally started raising them again. The Bank of Japan made a historic decision in December 2025, pushing rates to 0.75 percent – the highest level since September 1995. This marks a dramatic shift from an era when borrowing money was practically free.
Japan’s journey with ultra-low rates began after a massive economic bubble burst in 1989. Stock prices crashed, land values plummeted, and the economy entered what economists call the “Lost Decades.” Think of it like a carnival balloon deflating slowly – the air kept leaking out no matter how hard anyone tried to pump it back up. The country struggled with falling prices and sluggish growth for years.
Like a carnival balloon deflating slowly, Japan’s economy kept losing air despite desperate attempts to reinflate it.
To fight this economic slowdown, Japan became a pioneer in unusual money policies. In 1999, they introduced the world’s first zero interest rate policy. Later, they tried quantitative easing in 2001, buying massive amounts of government bonds to pump money into the economy. In 2016, they even experimented with negative interest rates, fundamentally charging banks to park their money. The central bank also implemented yield curve control in 2016 to manage long-term interest rates alongside short-term policy rates.
These extraordinary measures were like giving the economy multiple shots of caffeine, but the patient remained drowsy. Inflation stayed stubbornly low despite all efforts. The central bank kept rates near zero for so long that an entire generation grew up never knowing what normal interest rates looked like. During this period, the economy suffered from declining productivity as traditional sectors like manufacturing and services struggled with low investment levels.
However, things started changing recently. Global inflation surged between 2021 and 2023, finally pushing Japan above its 2 percent inflation target. Workers began receiving wage increases, and corporate profits improved. The economy showed signs of genuine recovery rather than artificial stimulation. Like forex markets that operate across different time zones, Japan’s recovery has been influenced by global economic conditions and currency movements that affect international trade relationships.
The Bank of Japan began cautiously raising rates in 2024, with the first increase in 17 years. They moved slowly and carefully, like someone testing ice before walking across a frozen pond. Even at 0.75 percent, rates remain historically low and supportive of economic growth.
This shift marks Japan potentially ending its long battle with deflation and returning to more normal economic conditions after decades of extraordinary monetary policy.
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