The Bank of Japan (BOJ) raised its benchmark interest rate to the highest level in three decades (per Bloomberg, as quoted on Yahoo Finance) and signaled that further increases are likely. Governor Kazuo Ueda’s policy board unanimously lifted the policy rate by 25 basis points to 0.75% on Dec. 19, 2025. The move was widely anticipated, with all 50 economists surveyed by Bloomberg expecting the hike.

The BOJ remains an exception among major central banks as the only one raising rates, this year. Japanese government bond yields climbed, with the 10-year yield rising above 2% to its highest level since 1999, per the above-mentioned source.

Neutral Rate Yet to be Reached

Markets were watching closely for clues about the so-called neutral rate — the level at which policy is neither accommodative nor restrictive. The BOJ estimates the neutral rate to be somewhere between 1% and 2.5%. Ueda noted that the current policy rate remains below the lower end of that range, as mentioned in the same Bloomberg article.

Inflation Gains Momentum

The latest decision underscored Ueda’s determination to continue lifting rates — a dramatic shift after decades of deflationary pressure following the early-1990s asset bubble collapse. Key consumer inflation gauge rose 3% in November, marking 44 successive months at or above the BOJ’s 2% target.

What Lies Ahead?

Former BOJ executive director Kazuo Momma said the central bank is likely to continue hiking at a gradual pace – “once every six months or so”, as quoted on the above-said Bloomberg article. Although the rise of monetary easing advocate Sanae Takaichi as prime minister in October had raised questions about Ueda’s freedom to normalize policy, persistent inflation and a weaker yen went against the agenda of monetary policy easing. A weaker currency may raise import-driven inflation, which in turn may lead to higher living costs.

ETF Strategies to Follow

Against this backdrop, below we highlight a few winning exchange-traded fund (ETF) strategies that could be followed in the near term.

Yen Pressure to Continue?

Even after Friday’s hike, Japan’s policy rate remains well below its inflation rate, while U.S. borrowing costs exceed inflation there. The interest-rate gap between the two countries has narrowed by 125 basis points this year, though yen weakness has persisted, per Bloomberg, as quoted on Yahoo Finance.

Invesco CurrencyShares Japanese Yen Trust (FXY Quick QuoteFXY - Free Report) has lost 6.2% over the past six months. Investors are probably borrowing cheap yen and invest in higher-yielding assets abroad, creating a selling pressure in the yen. BOJ also did not sound hawkish; it behaved moderately dovish.

Moreover, prime minister Sanae Takaichi is a proponent of monetary easing. Against this backdrop, investors can tap inverse yen ETF ProShares UltraShort Yen (YCS Quick QuoteYCS - Free Report) , which has added 17.8% over the past six months.

Value ETFs to Gain?

If rates rise in Japan, value-based ETFs are likely to fare better than growth stocks. Hence, investors can tap iShares MSCI Japan Value ETF (EWJV).