If the future economic and price trends align with expectations, the policy interest rate will continue to be raised and the degree of monetary easing will be adjusted.
Author: Jin Shi Data
On December 19, the Bank of Japan raised the benchmark interest rate from 0.5% to 0.75%, in line with market expectations. This interest rate level is the highest in 30 years, and it marks the Bank of Japan's first rate hike in 11 months since January 2025.
Full Text of the Policy Statement
Changes in Monetary Market Operation Guidelines
At today's monetary policy meeting, the Bank of Japan's Policy Board unanimously decided to set the monetary market operation guidelines for the meeting interval period as follows:
The Bank of Japan will guide the uncollateralized overnight call rate to remain at around 0.75%.
Based on the adjustment of the monetary market operation guidelines, the Bank of Japan unanimously decided to adjust the applicable interest rates for its related measures.
(1) Applicable Interest Rate for Supplementary Deposit Facility
The applicable interest rate for the supplementary deposit facility (i.e., the portion of the balance in the current accounts held by financial institutions at the Bank of Japan, excluding the required reserves) is 0.75%.
(2) Basic Loan Rate
The basic loan rate applicable under the supplementary loan facility is 1.0%.
The overall Japanese economy is showing a moderate recovery, but there are still certain weaknesses in some areas. In terms 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 negotiations, as well as first-hand information collected by the Bank of Japan's headquarters and branches, it can be highly assured that after achieving stable wage increases this year, companies will continue to steadily raise wages next year, and the risk of interruption in companies' proactive wage-setting behavior is expected to be low.
Although uncertainties surrounding the U.S. economy and the trade policies of various economies still exist, these uncertainties have decreased. In terms of prices, 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 first-hand information, it can be highly assured 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 the latter half of the forecast period of the "Economic Activity and Price Outlook" report in October 2025, where the core CPI inflation rate is generally consistent with the 2% price stability target, is increasing.
In light of the developments in economic activity and price conditions mentioned above, the Bank of Japan judges that a moderate adjustment of the degree of monetary easing is appropriate from the perspective of sustainably and stably achieving the 2% price stability target. After the adjustment of the policy interest rate, the real interest rate is expected to remain significantly negative, and the accommodative financial environment will continue to strongly support economic activity.
Regarding future monetary policy operations, given that the current real interest rate is at a significantly low level, if the economic activity and price outlook shown in the October 2025 report is realized, the Bank of Japan will continue to raise the policy interest rate and adjust the degree of monetary easing as economic activity and prices improve. Regarding 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 sustainably and stably achieving that target.
Japan's Economic Activity and Prices: Current Situation and Outlook
The overall Japanese economy is showing a moderate recovery, but there are still certain weaknesses in some areas. The overseas economy is generally maintaining moderate growth, but there are also signs of weakness in some areas due to the trade and other policies of various economies. Exports and industrial production are generally flat in trend but have been affected by the tariffs imposed by the U.S.
Corporate profits remain high overall, although there have been downward impacts from tariffs in the manufacturing sector, and corporate sentiment remains at a relatively favorable level. In this context, corporate fixed investment is showing a moderate upward trend.
Private consumption remains resilient against the backdrop of improved employment and income conditions, but it is affected by rising prices. On the other hand, residential investment has declined.
Meanwhile, public investment is generally holding steady. The financial environment remains accommodative.
In terms of prices, as wage increases continue to be passed on to sales prices, influenced by rising prices of food items such as rice and other factors, the year-on-year increase in the consumer price index excluding fresh food has recently maintained around 3%. Inflation expectations are rising moderately.
Due to the impact of trade and other policies of various economies, the growth rate of the overseas economy is slowing, which is affecting the domestic economy through channels such as declining corporate profits. Japan's economic growth is expected to remain moderate, but the accommodative financial environment and other factors are expected to provide support.
Subsequently, as the overseas economy returns to a growth trajectory, Japan's economic growth rate is expected to rebound. As the impact of rising food prices, including rice, gradually diminishes, and some effects from government measures to address rising prices are felt, the year-on-year increase in the CPI excluding fresh food is expected to slow to below 2% before the first half of the fiscal year 2026.
Thereafter, as the economic growth rate rebounds, labor shortages become more pronounced, and medium- to long-term inflation expectations rise, core CPI inflation and the increase in the CPI excluding fresh food are expected to gradually rise, reaching levels generally consistent with the price stability target in the latter half of the forecast period of the "Economic Activity and Price Outlook" report in October 2025.
Risks facing the outlook include: the trends in overseas economic activity and prices under the influence of trade and other policies of various economies, corporate wage and price-setting behavior, and movements 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.
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