The recent interest rate hike by the Bank of Japan has attracted quite a bit of market attention.

First, the confirmed part — the interest rate statement will be released on December 19. But what the market is really betting on is whether there will be consecutive rate hikes afterward. The current rate is stuck at 0.5%, and this time it’s raised to 0.75%. The increase doesn’t sound large, but the question is how it will move forward.

According to previous expectations, the Bank of Japan needs to bring interest rates back to a neutral level, which is roughly 1.25%. That means the market is betting on two more rate hikes. Sounds frequent? Looking at history makes it clear. The last time there were consecutive rate hikes started in March 2024 and continued until January this year — a full 10 months — raising the rate from -0.1% to 0.5%.

The harsh reality is that prices in Japan are still rising, and inflation has remained above 2% for three years. Public complaints are ongoing — the pace of rate hikes by the central bank can’t keep up with inflation, resulting in real borrowing costs still being very low.

The expectation of rate hikes itself tends to stimulate the market, and when combined with December — North American Christmas holidays and year-end breaks — liquidity is already at its worst, and volatility naturally gets amplified. Multiple factors stacking together make it quite challenging for the market to digest.

Of course, there are many factors affecting asset prices, and this is just one dimension of observation.