Bank of Japan Full Statement: 25bp Rate Hike, Further Adjustments Under Consideration

On December 19, the Bank of Japan raised its benchmark interest rate from 0.5% to 0.75%, matching market expectations. This move brings rates to a 30-year high and marks the central bank’s first rate hike in 11 months since January 2025.

Full Policy Statement

Changes to Money Market Operations Guidance

At its monetary policy meeting today, the Bank of Japan’s Policy Board unanimously decided to implement the following guidance for money market operations between meetings:

The Bank of Japan will guide the uncollateralized overnight call rate to remain near 0.75%.

Reflecting changes in the money market operations guidance, the Bank of Japan unanimously approved adjustments to the interest rates applied to related measures.

(1) Interest Rate on the Complementary Deposit Facility

The interest rate for the Complementary Deposit Facility—applied to the portion of financial institutions’ current account balances at the Bank of Japan exceeding required reserves—is set at 0.75%.

(2) Basic Loan Rate

The basic loan rate under the Complementary Lending Facility is set at 1.0%.

Japan’s economy is experiencing a moderate recovery overall, though some sectors remain sluggish. The labor market stays tight, and corporate profits are generally expected to remain elevated, even factoring in the effects of tariff policies.

Given these conditions, and considering both the positions taken in annual spring wage negotiations and first-hand information from the Bank of Japan’s head office and branches, there is strong confidence that, after robust wage increases this year, companies will continue to steadily raise wages next year. The risk of disruption to proactive wage-setting behavior appears low.

While uncertainties remain regarding the U.S. economy and the impact of global trade policies, these uncertainties have lessened. On the price front, as companies continue to pass wage hikes through to sales prices, core Consumer Price Index (CPI) inflation maintains a moderate upward trend.

Recent data and first-hand information support a high degree of confidence that the mechanism of simultaneous, moderate increases in wages and prices will persist. As a result, the probability is rising that, in the second half of the forecast period following the October 2025 “Outlook for Economic Activity and Prices,” core CPI inflation will largely align with the 2% price stability target.

Given these developments in economic activity and prices, the Bank of Japan believes that a moderate adjustment to the degree of monetary accommodation is appropriate to sustainably and stably achieve the 2% price stability target. Even 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.

Looking ahead, with real interest rates still at notably low levels, if the economic and price outlook in the October 2025 report materializes, the Bank of Japan will continue to raise the policy rate and adjust monetary accommodation as economic activity and prices improve. The Bank will implement monetary policy in a timely manner, based on changes in economic conditions, prices, and financial markets, to ensure the sustainable and stable achievement of the 2% price stability target.

Japan’s Economic Activity and Prices: Current Status and Outlook

Japan’s economy is showing moderate recovery overall, though some sectors remain weak. Overseas economies are generally growing at a moderate pace, but some regions are showing softness due to trade and other policy factors. Exports and industrial production are largely flat, impacted by higher U.S. tariffs.

Corporate profits remain high overall. Although tariffs have weighed on manufacturing, business sentiment is still relatively favorable. In this environment, corporate fixed investment continues its moderate upward trend.

Private consumption remains resilient amid improving employment and income conditions, though it is affected by rising prices. In contrast, housing investment has declined.

Public investment has been broadly stable. Financial conditions remain accommodative.

On prices, wage hikes are being passed through to sales prices, and food prices—including rice—have risen. As a result, the year-on-year increase in the CPI excluding fresh food recently held around 3%. Inflation expectations are trending moderately higher.

Slower overseas growth—driven by trade and other policy factors—has weighed on Japan’s economy via lower corporate profits. While growth is expected to remain moderate, accommodative financial conditions should provide support.

As overseas economies return to growth, Japan’s economic growth rate is expected to recover. As the impact of food price increases (including rice) lessens and government measures to address inflation take effect, the year-on-year increase in the CPI excluding fresh food is projected to fall below 2% by the first half of fiscal 2026.

Subsequently, as growth accelerates, labor shortages intensify, and medium- to long-term inflation expectations rise, both core CPI inflation and the increase in CPI excluding fresh food should gradually pick up. By the latter half of the forecast period after the October 2025 “Outlook for Economic Activity and Prices,” these measures are expected to reach levels broadly consistent with the price stability target.

Risks to this outlook include: the trajectory of overseas economic activity and prices under the influence of trade and other policies; corporate wage and price-setting behavior; and developments in financial and foreign exchange markets. These risks warrant close attention for their potential impact on Japan’s economy and prices.

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