At the end of 2025, the central banks of Australia and Japan, the two major Asia-Pacific economies, made decisions with completely different directions within the same time window - the Reserve Bank of Australia maintained interest rates and ended the easing cycle, while the Bank of Japan finalized an interest rate increase in December and started policy tightening. The decisions of the two are driven by their own fundamentals, share the core anchor point of inflation, and face the common dilemma of uncertainty in policy paths. Their linkage and differences outline the complex pattern of Asia-Pacific monetary policy at the end of the year. Inflation is the common core incentive for the two major central banks to adjust their policies. However, based on the pain points of their respective economies, the two have adopted differentiated responses of "maintaining stability and waiting and watching" and "actively raising interest rates."

Reserve Bank of Australia: Termination of interest rate cuts as inflation picks up, maintaining stability and buffering policy lag

Since February 2025, the Reserve Bank of Australia has cut interest rates by a total of 75 basis points. However, an unexpected rebound in inflation in the second half of the year broke expectations for further interest rate cuts, and the year-end meeting decided to maintain the cash rate at 3.60%. Although the central bank believes that part of the rebound in underlying inflation is temporary, and the reference value of the new monthly CPI series is questionable, the data has shown the persistence of a broad-based rebound in inflation, which has become a key basis for ending the easing cycle. This move also takes into account the policy lag: the loose environment since the beginning of the year has not yet been fully transmitted to demand, prices and wages, and a hasty increase in interest rates may impact the recovering private demand (both consumption and investment increase); while maintaining stability can not only observe the persistence of inflation, but also stabilize the overheating of the housing market through the reversal of interest rate expectations.

Bank of Japan: Inflation coupled with a weak yen, raising interest rates to relieve dual pressures

The Bank of Japan's interest rate hike also anchors inflation, and adds to the dilemma of a weak yen - the yen fell to a 10-month low, triggering the threat of intervention, and high inflation impacted the government's support rate. This pressure became the key for Governor Kazuo Ueda to convince Prime Minister Takaichi Sanae, who opposed the interest rate hike. Compared with the "wait-and-see response" of the Reserve Bank of Australia, the Bank of Japan took the initiative to raise interest rates by 25 basis points to 0.75% (a new high in 30 years), which not only alleviated imported inflation, but also stabilized the exchange rate by increasing the real interest rate. This move also shoulders the mission of policy normalization and is the key to Ueda Kazuo's solution to the problems left by his predecessor's radical stimulus. It is in stark contrast to the RBA's goal of "buffering policy lag".

Both major central banks need to break through constraints to implement their policies, but the core difference lies in "dependence on economic data" and "balance of political demands," which directly determines the pace of policy advancement.

The Reserve Bank of Australia's decision-making process is anchored by data, and there is no obvious political game. The constraints focus on three data uncertainties: first, the validity of the inflation data (the reference value of the new monthly CPI series is questionable); second, the contradictions in the labor market (the unemployment rate is rising but the under-utilization rate is low, difficulty in recruiting workers and high unit labor costs coexist); third, the private sector momentum rebounds more than expected or intensifies pressure on production capacity. To this end, the Reserve Bank of Australia has made it clear that it “needs to update its outlook judgment based on data” and deeply binds its decision-making with global economic, domestic demand, inflation and labor market data, highlighting the characteristics of “data-dependent” monetary policy.

The Bank of Japan's interest rate hike is a precise political balancing act - Prime Minister Takaichi Sanae once bluntly said that raising interest rates is "stupid". The government has always advocated easing, and eliminating political resistance is the core prerequisite for Kazuo Ueda to advance interest rates. Ueda Kazuo broke through the situation through three steps: first, he used the weak yen and inflationary pressure to persuade the Prime Minister to endorse "gradual interest rate hikes to achieve a soft landing of prices" at an unconventional meeting on November 18; second, he pushed Finance Minister Katayama Satsuki to express support for "gradual adjustments" to the policy and clear cabinet obstacles; third, in his speech on December 1, he praised the "Abenomics" promoted by Sanae Takaichi and consolidated the political foundation. This logic of “breaking political resistance first and then pushing ahead with operations” is in sharp contrast to the “data-driven” approach of the Reserve Bank of Australia.

Common dilemmas in policy paths: the game of market expectations under uncertainty

Although the policy directions are different, the two major central banks are faced with the common dilemma of ambiguous policy paths, and the dilemma is directly transmitted to the market, triggering a long-term expectation game, and uncertainty triggers differentiated market reactions. In Australia, interest rate expectations have reversed to hedge against the overheating housing market, and the rise in money market interest rates and government bond yields has gradually changed the easing environment; in Japan, the "uneasy truce" between the central bank and the government has put pressure on the bond market, and investors' focus has shifted from "whether to raise interest rates" to "follow-up steps." Nomura Securities pointed out that if Ueda Kazuo cannot clearly signal a continued interest rate increase, the yen may fall again. If he hints at a steady increase in interest rates, it will trigger government tension and be in a communication dilemma.

Although the policy directions are different, the two major central banks are faced with the common dilemma of ambiguous policy paths, and the dilemma is directly transmitted to the market, triggering a long-term expectation game, and uncertainty triggers differentiated market reactions. In Australia, interest rate expectations have reversed to hedge against the overheating housing market, and the rise in money market interest rates and government bond yields has gradually changed the easing environment; in Japan, the "uneasy truce" between the central bank and the government has put pressure on the bond market, and investors' focus has shifted from "whether to raise interest rates" to "follow-up steps." Nomura Securities pointed out that if Ueda Kazuo cannot clearly signal a continued interest rate increase, the yen may fall again. If he hints at a steady increase in interest rates, it will trigger government tension and be in a communication dilemma.

Enlightenment from the divergence of Asia-Pacific monetary policies

The year-end operations of the two major central banks are essentially a differentiated test of the "post-easing era" of Asia-Pacific economies: the Reserve Bank of Australia is a cautious wait-and-see faction under "recovery inflation + policy lag", and its decision-making focuses on the balance of internal data; the Bank of Japan is an active tightener under "exchange rate pressure + policy normalization", and its operations need to take into account political games and market expectations. This division not only reflects the fundamental differences between Asia-Pacific economies, but also provides a new anchor point for regional capital flows, exchange rate trends and asset pricing. It also indicates that Asia-Pacific monetary policy will enter a complex stage of "differentiation and linkage" in 2026.