Original Article Title: "Bank of Japan Statement: 25 Basis Point Rate Hike, Considering Further Adjustments"

Original Source: FXStreet

On December 19, the Bank of Japan raised its benchmark interest rate from 0.5% to 0.75%, in line with market expectations. The interest rate level reached a new high in 30 years, marking the Bank of Japan's first rate hike in 11 months since January 2025.

Full Policy Statement

Changes in Monetary Market Operations Guidance

At today's monetary policy meeting, the Bank of Japan Policy Board unanimously decided to set the monetary market operations guidance for the intermeeting period as follows:

The Bank of Japan will guide the unsecured overnight call rate to be maintained at around 0.75%.

In line with the adjustment to the monetary market operations guidance, the Bank of Japan unanimously decided to adjust the rates applicable to its relevant measures.

(1) Interest Rate on Excess Reserves

The interest rate on excess reserves (i.e., the rate applicable to the portion of financial institutions' current account balances held at the Bank of Japan after deducting required reserves) is set at 0.75%.

(2) Policy-Rate Loans

The policy-rate loans under the excess reserves facility have an applicable policy rate loan at 1.0%.

While the Japanese economy is showing a moderate recovery overall, some areas still exhibit weakness. Considering 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 situation, taking into account the stance of both labor and management in the annual spring wage negotiations and the firsthand information collected through the Bank of Japan's head office and branches, there is high confidence that after achieving robust wage increases this year, companies will continue to steadily raise wages next year, with a low risk of interruptions to proactive wage setting by companies.

Although uncertainty remains surrounding the U.S. economy and the impact of trade policies on various economies, this uncertainty has decreased. On the price front, as companies continue to pass on wage increases to sales prices, the core Consumer Price Index (CPI) inflation continues to show a moderate upward trend.

Based on recent data and firsthand information, it can be highly assured that the mechanism of wages and prices rising moderately in sync will be maintained. Against this backdrop, as of the latter half of the forecast period of the "Outlook for Economic Activity and Prices" in October 2025, the likelihood of the baseline scenario, where the basic CPI inflation rate broadly aligns with the 2% price stability target, is increasing.

Given the developments in economic activity and prices mentioned above, the Bank of Japan judges that from the perspective of sustainably and stably achieving the 2% price stability target, a moderate adjustment of the monetary easing level is appropriate. After the policy rate adjustment, real interest rates are expected to remain significantly negative, and the accommodative financial environment will continue to strongly support economic activity.

Regarding future monetary policy operations, considering the current significantly low level of real interest rates, if the economic activity and price outlook as indicated in the October 2025 outlook report materialize, the Bank of Japan will continue to raise the policy rate and adjust the level of monetary easing as economic activity and prices improve. Around the 2% price stability target, the Bank of Japan will, from the perspective of sustainably and stably achieving this target, implement monetary policy in a timely manner based on changes in economic activity, prices, and financial conditions.

Economic Activity and Prices in Japan: Current Situation and Outlook

Japan's economy is showing a mild recovery overall, but some areas still exhibit certain weaknesses. The global economy is maintaining mild growth overall, but partial weakness is also evident due to trade tensions and other policy impacts on various economies. Exports and industrial production are generally flat in trend but are affected by the U.S. tariffs.

Corporate profits are generally at high levels, although the manufacturing sector has seen a downturn due to tariff effects, business sentiment remains at a relatively favorable level. In this context, corporate fixed investment is showing a mild upward trend.

Private consumption remains resilient against the backdrop of improving employment and income conditions but is affected by price increases. On the other hand, residential investment is declining.

At the same time, public investment overall remains largely unchanged. The financial environment remains accommodative.

In terms of prices, as wage increases continue to pass through to retail prices and influenced by rising food prices such as rice and other factors, the year-on-year growth rate of the consumer price index excluding fresh food has recently remained at around 3%. Inflation expectations are rising moderately.

Impacted by the trade and other policies of various economic entities, overseas economic growth has slowed down, which has had an impact on the domestic economy through channels such as a decrease in corporate profits. Japan's economic growth is expected to remain moderate, but factors such as a loose financial environment are expected to provide support.

In the future, as overseas economies return to a growth trajectory, Japan's economic growth rate is expected to recover. With the gradual weakening impact of rising food prices, including rice, and partly due to government measures to address price increases, the year-on-year growth rate of CPI excluding fresh food is expected to slow to below 2% by the first half of the fiscal year 2026.

Subsequently, as the economic growth rate rebounds, the sense of labor shortage increases, and medium- to long-term inflation expectations rise, the core CPI inflation and the inflation rate excluding fresh food are expected to gradually increase. By the latter half of the forecast period of the "Outlook for Economic Activity and Prices" in October 2025, they are expected to reach a level broadly consistent with the price stability target.

The outlook faces risks including: overseas economic activity and price trends under the influence of trade and other policies of various economic entities, companies' wage and price-setting behavior, as well as the trends in financial markets and foreign exchange markets. It is essential to closely monitor the impact of these risks on Japan's economic activity and prices.

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