Bank of Japan Maintains Monetary Policy

Japan’s economy continues its gradual recovery, though some sectors show signs of weakness.

At today’s Monetary Policy Meeting, the Bank of Japan (BOJ) Policy Board unanimously decided to maintain its monetary policy stance, keeping the uncollateralized overnight call rate at approximately 0.5% during the meeting period.

Japan’s Economic Recovery Remains Moderate

While global economic growth remains stable, Japan’s exports and industrial production have been relatively flat. Business investment has followed a gradual upward trend, supported by strong corporate profits. The labor market and household incomes have improved moderately, contributing to a steady rise in private consumption despite inflationary pressures. However, housing investment remains weak, while public investment has remained stable. Financial conditions remain accommodative, supporting economic activity.

Inflation Trends and Price Stability Goals

Japan’s core Consumer Price Index (CPI), which excludes fresh food, has been increasing at an annual rate of 3.0-3.5% in recent months. This rise is mainly driven by higher service prices linked to wage growth and the gradual removal of government measures that previously offset energy costs. However, the inflationary impact of past import price hikes has diminished, and inflation expectations have risen moderately.

Japan’s economy is expected to maintain a growth rate above its potential, supported by global expansion and a strengthening income-spending cycle. While past cost-push inflation pressures are expected to subside, underlying inflation is projected to rise gradually, driven by an improving output gap, labor shortages, and higher long-term inflation expectations. By the second half of the BOJ’s January 2025 Outlook Report projection period, core CPI inflation is expected to move closer to the central bank’s price stability target.

Key Inflation Drivers and Risks

Despite the positive economic outlook, significant uncertainties remain regarding Japan’s growth and inflation trajectory. Potential risks include shifts in global trade policies, international economic fluctuations, commodity price volatility, and domestic wage- and price-setting behaviors. Close attention is needed to financial and foreign exchange market developments, as exchange rate fluctuations are expected to have a greater impact on inflation than in previous years, particularly as firms focus more on wage and price adjustments.

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