On December 19, the Bank of Japan (BOJ) announced its interest rate decision, raising the policy rate by 0.25% to 0.75%, marking the highest level in 30 years since 1995. This hike follows an 11-month pause since January 2025. Krishna Bhimavarapu, Asia-Pacific economist at State Street Global Advisors, believes the BOJ's policy rate is approaching a turning point, where the sustainability of normalization matters more than merely catching up. By 2026, as the U.S. accelerates its rate cuts, the BOJ is less likely to lag behind in gradual rate hikes, as convergence will quicken. Japan's macroeconomic environment is expected to remain favorable next year, reinforcing the BOJ's commitment to policy normalization—even if the Federal Reserve maintains easing. Notably, this scenario could unfold even with an accelerated balance sheet normalization process. Masahiko Loo, senior fixed income strategist at State Street Global Advisors, stated that the BOJ's 0.25% hike to 0.75% is a done deal, though its execution hinges on Governor Kazuo Ueda's stance, requiring a delicate balance between dovish and hawkish approaches. Excessive easing could further weaken the yen, while overly hawkish moves risk repeating the market sell-off seen in July 2024. Meanwhile, strong technical support and improved yield appeal are expected to stabilize Japanese government bonds, attracting foreign inflows, while domestic financing keeps Japan's debt profile robust.