Looking at the latest data, the Bank of Japan's current interest rate remains at 0.5%, but the market almost universally expects this week's (December 18-19) policy meeting to directly raise it by 25 basis points to 0.75%. This level may not sound high, but in fact, it is the highest in 30 years since 1995.

The market assigns a probability in the range of 94%-95%, which is essentially a certainty. What supports such strong confidence? Several factors are driving this:

First, inflation hasn't subsided. Japan's core CPI has been stuck above the 2% target line, expected to be in the range of 2.4%-2.7% in 2025, indicating ongoing price pressures. Second, wages are also rising quite rapidly. The results of spring labor negotiations this year were positive, and it is expected that this momentum will continue into spring 2026.

Another hidden driver is the aftermath of the yen's depreciation. The cost of imported goods has increased, leading to imported inflation. Relying solely on other measures isn't enough, so the central bank must use the big tool of rate hikes to cool the economy.