The Bank of Japan, which had been silent for a full thirty years, is finally taking action. At the December monetary policy meeting, the benchmark interest rate was raised to 0.75%, the highest level since 1995. More importantly, the meeting minutes made no attempt to obscure this — this is just the beginning, and there is still considerable room for further rate hikes.

This delayed policy shift did not happen out of nowhere. The pressures behind it are numerous and overwhelming.

**The dual squeeze of inflation and negative interest rates** is one of them. The core CPI has remained above the 2% target for nearly four consecutive years, recently soaring to around 3%. Ironically, Japan’s real interest rates are still among the lowest globally, causing the savings and investments of ordinary people to continually depreciate. This has forced the central bank to return to common sense.

**The continuous depreciation of the yen is also creating a vicious cycle**. A weak exchange rate pushes up the costs of imported goods like energy and food, leading to increasing imported inflation — a point increasingly emphasized by central bank officials, who explicitly state that frequent rate hikes are needed to curb the yen’s decline.

**A massive capital exodus driven by arbitrage** is underway. When the era of negative interest rates comes to an end, carry trades based on low-yen financing lose their purpose. Massive amounts of cheap yen capital are accelerating outflows, putting pressure on Japanese stocks, bonds, and the currency markets simultaneously. The impact on the global liquidity landscape cannot be underestimated — and effects on the crypto market are gradually becoming apparent.

**The neutral interest rate is still a long way off**. The 0.75% rate is still far from the central bank’s defined neutral range of 1%-2.5%. The central bank officials straightforwardly said, "We are still quite far from our target." This effectively sets a clear path for future rate hikes.

From Japan’s domestic market to the global financial ecosystem, the chain reaction of this shift has already begun to ferment.