If future economic and price trends align with the outlook, policy interest rates will continue to rise and the degree of monetary easing will be adjusted.
Article author and source: Jinshi Data
On December 19, the Bank of Japan raised its benchmark interest rate from 0.5% to 0.75%, in line with market expectations. This is the highest interest rate in 30 years, and the first rate hike by the Bank of Japan in 11 months since January 2025.
Full text of the policy statement
Changes to Money Market Operations Guidelines
At today's monetary policy meeting, the Bank of Japan's Policy Board unanimously approved the following guidelines for money market operations during meeting intervals:
The Bank of Japan will guide the unsecured overnight call rate to remain at around 0.75%.
In accordance with the adjustment of its money market operations guidelines, the Bank of Japan unanimously approved the decision to adjust the interest rates applicable to its related measures.
(1) Applicable interest rate for supplementary deposit facilities
The applicable interest rate for the Supplemental Deposit Facility (i.e., the interest rate applicable to the portion of the current account balance held by financial institutions at the Bank of Japan after deducting required reserves) is 0.75%.
(2) Basic loan interest rate
The basic lending rate applicable under the Supplemental Lending Facility is 1.0%.
The Japanese economy is showing a moderate recovery overall, but some weaknesses remain in certain areas. Looking at the background conditions of wage trends, the labor market remains tight, and corporate profits are expected to remain high overall, even considering the impact of tariff policies.
In this context, taking into account the positions of both labor and management in the annual spring labor-management negotiations, as well as first-hand information collected from the Bank of Japan's headquarters and branches, it is highly likely that following this year's steady wage increases, companies will continue to steadily raise wages next year, and the risk of companies' proactive wage-setting activities being interrupted is expected to be low .
While uncertainties surrounding the U.S. economy and the impact of trade policies in various economies remain, these uncertainties have somewhat diminished. On the price front, underlying consumer price index (CPI) inflation continues its moderate upward trend as businesses continue to pass on wage increases to retail prices.
Based on recent data and firsthand information, there is a high degree of confidence that the mechanism of moderate, synchronized wage and price increases will be maintained. Against this backdrop, the likelihood of achieving the baseline scenario—where underlying CPI inflation is broadly consistent with the 2% price stability target in the latter half of the forecast period outlined in the October 2025 Economic Activity and Price Outlook (Outlook Report)—is increasing.
In light of the aforementioned economic activity and price developments, the Bank of Japan judges that a moderate adjustment to the degree of monetary easing is appropriate from the perspective of sustainably and stably achieving its 2% price stability target. Following the adjustment of the policy rate, real interest rates are expected to remain significantly negative, and the loose financial environment will continue to strongly support economic activity.
Regarding future monetary policy operations, given the current significantly low level of real interest rates, if the economic activity and price outlook projected in the October 2025 Outlook Report is realized, the Bank of Japan will continue to raise policy interest rates and adjust the degree of monetary easing as economic activity and prices improve. Around its 2% price stability target, the Bank of Japan will implement monetary policy in a timely manner, based on changes in economic activity, prices, and financial conditions, from the perspective of achieving this target sustainably and stably.
Japan's Economic Activity and Prices: Current Situation and Outlook
The Japanese economy is showing a moderate recovery overall, but some weaknesses remain in certain sectors. The global economy is generally maintaining moderate growth, but some sectors are showing weakness due to the influence of trade and other policies by various economies. Exports and industrial production are generally flat in trend, but are affected by the US tariffs.
Overall corporate profits remained high, and despite the downward impact of tariffs on the manufacturing sector, the business climate outlook remained relatively favorable. Under these circumstances, corporate fixed investment showed a moderate upward trend.
Private consumption remained resilient against the backdrop of improved employment and income conditions, but was affected by rising prices. On the other hand, residential investment declined.
At the same time, public investment remained largely unchanged overall. Financial conditions remained loose.
Regarding prices, as wage increases continue to be passed on to retail prices, and influenced by rising prices of food such as rice and other factors, the year-on-year increase in the Consumer Price Index (CPI), excluding fresh food, has recently remained at around 3%. Inflation expectations are rising moderately.
Affected by trade and other policies of various economies, overseas economic growth has slowed down, impacting the domestic economy through channels such as declining corporate profits. Japan's economic growth is expected to remain moderate, but factors such as a loose financial environment are expected to provide support.
Subsequently, as overseas economies return to a growth trajectory, Japan's economic growth rate is expected to rebound. With the impact of rising food prices, including rice, gradually diminishing, and partly due to government measures to address inflation, the year-on-year CPI increase excluding fresh food is projected to slow to below 2% by the first half of fiscal year 2026.
Subsequently, as the economic growth rate recovers, the sense of labor shortage intensifies, and medium- to long-term inflation expectations rise, the underlying CPI inflation and the CPI growth rate excluding fresh food are expected to gradually increase, reaching a level broadly consistent with the price stability target in the latter half of the forecast period in the October 2025 Economic Activity and Price Outlook.
The risks facing Japan's economy include: overseas economic activity and price trends under the influence of trade and other policies of various economies, corporate wage and price-setting behavior, and the dynamics of financial and foreign exchange markets. It is necessary to pay close attention to the impact of these risks on Japan's economic activity and prices.
