Author: Jinshi Data
On December 19, the Bank of Japan raised the benchmark interest rate from 0.5% to 0.75%, in line with market expectations. The interest rate level hit a 30-year high, marking the first rate hike in 11 months since January 2025.
Full Text of Policy Statement
Changes in Money Market Operations Guidance
At today's monetary policy meeting, the Bank of Japan's Policy Board unanimously voted to set the money market operations guidance for the inter-meeting period as follows:
The Bank of Japan will guide the uncollateralized overnight call rate to remain at around 0.75%.
In line with the adjustment of the money market operations guidance, the Bank of Japan unanimously voted to adjust the applicable rates for its related measures.
(1) Applicable Rate for Complementary Deposit Facility
The applicable rate for the complementary deposit facility (i.e., the rate applied to the portion of financial institutions' current account balances at the Bank of Japan, excluding required reserves) is 0.75%.
(2) Basic Loan Rate
The basic loan rate applicable under the complementary lending facility is 1.0%.
Japan's economy is showing a moderate recovery overall, but there are still some areas of weakness. Against the backdrop 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 wage negotiations and the firsthand information collected by the Bank of Japan's head office and branches, it is highly certain that following this year's solid wage increases, companies will continue to raise wages steadily next year, and the risk of companies interrupting their proactive wage-setting behavior is expected to be low.
Although uncertainties surrounding the U.S. economy and the impact of trade policies in various economies remain, these uncertainties have somewhat decreased. In terms of prices, as companies continue to pass on wage increases to sales prices, underlying consumer price index (CPI) inflation continues to show a moderate upward trend.
Based on recent data and firsthand information, it is highly certain that the mechanism of synchronized moderate increases in wages and prices will be maintained. Against this backdrop, the likelihood of achieving the baseline scenario, in which the underlying CPI inflation rate broadly aligns with the 2% price stability target in the latter half of the forecast period of the October 2025 "Outlook for Economic Activity and Prices" (Outlook Report), is increasing.
Given these developments in economic activity and prices, the Bank of Japan judges that it is appropriate to moderately adjust the degree of monetary easing from the perspective of achieving the 2% price stability target in a sustainable and stable manner. After the policy rate adjustment, real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to strongly support economic activity.
Regarding future monetary policy operations, given that current real interest rates are significantly low, if the economic activity and price outlook outlined in the October 2025 Outlook Report is realized, the Bank of Japan will continue to raise the policy rate and adjust the degree of monetary easing as economic activity and prices improve. With regard to the 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 the target in a sustainable and stable manner.
Japan's Economic Activity and Prices: Current Situation and Outlook
Japan's economy is showing a moderate recovery overall, but there are still some areas of weakness. Overseas economies are growing moderately overall, but show some weakness in parts due to trade and other policies of various economies. Exports and industrial production are largely flat in trend, but are affected by U.S. tariff increases.
Corporate profits remain high overall, although the manufacturing sector has seen some downward impact from tariffs, and business sentiment remains at a favorable level. In this situation, business fixed investment is trending moderately upward.
Private consumption remains resilient against the backdrop of improving employment and income conditions, but is affected by rising prices. On the other hand, housing investment has declined.
Meanwhile, public investment remains largely flat. Financial conditions remain accommodative.
In terms of prices, as wage increases continue to be passed on to sales prices, and influenced by factors such as rising food prices including rice, the year-on-year rate of increase in the consumer price index excluding fresh food has recently remained at around 3%. Inflation expectations are rising moderately.
Due to the impact of trade and other policies in various economies, overseas economic growth is slowing, which affects the domestic economy through channels such as declining corporate profits. Japan's economic growth is expected to remain moderate, but factors such as accommodative financial conditions are expected to provide support.
Thereafter, as overseas economies return to a growth trajectory, Japan's economic growth rate is expected to pick up. As the impact of rising food prices, including rice, gradually diminishes, and partly due to government measures to address price increases, the year-on-year rate of increase in the CPI excluding fresh food is expected to slow to below 2% by the first half of fiscal 2026.
Thereafter, as the economic growth rate picks up, the sense of labor shortage intensifies, and medium- to long-term inflation expectations rise, underlying CPI inflation and the rate of increase in the CPI excluding fresh food are expected to gradually increase and, in the latter half of the forecast period of the October 2025 "Outlook for Economic Activity and Prices," reach levels broadly consistent with the price stability target.
Risks to the outlook include: the trajectory of overseas economic activity and prices under the influence of trade and other policies of various economies, corporate wage and price-setting behavior, and developments in 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.
