Full text of the Bank of Japan statement: Raise interest rates by 25 basis points, consider further adjustments subsequently

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 rate level is the highest in 30 years, and this marks the first rate hike by the Bank of Japan in 11 months since January 2025.

Full Policy Statement

Changes in Market Operations Guidance

At today's monetary policy meeting, the Policy Board of the Bank of Japan unanimously decided to set the following guidance for market operations during the inter-meeting period:

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

In accordance with the adjustment to the market operations guidance, the Bank of Japan unanimously decided to revise the interest rates applicable to its related measures.

(1) Complementary Deposit Facility Rate

The interest rate applied to the complementary deposit facility (i.e., the rate applied to the portion of financial institutions' current account balances held at the Bank of Japan after deducting required reserves) is 0.75%.

(2) Basic Loan Rate

The basic loan rate applicable under the complementary lending facility is 1.0%.

The Japanese economy as a whole shows signs of moderate recovery, though some weakness remains in certain areas. In terms of wage trend fundamentals, labor markets remain tight, and corporate profits are expected to stay broadly high overall, even considering the impact of tariff policies.

Under these circumstances, taking into account the positions of labor and management in annual spring wage negotiations, as well as first-hand information collected through the Bank of Japan’s head office and branch network, it can be highly confident that following this year's solid wage increases, companies are expected to continue steadily raising wages next year, with low risk of disruption to proactive corporate wage-setting behavior.

Although uncertainties surrounding the U.S. economy and trade policy impacts across economies persist, these uncertainties have somewhat diminished. On the price front, as firms continue to pass rising wages on to selling prices, underlying consumer price index (CPI) inflation continues to show a moderately rising trend.

Based on recent data and first-hand information, it can be highly confident that the mechanism of moderate, synchronized wage and price increases will be sustained. Against this backdrop, the likelihood is increasing that after the latter half of the forecast period in the October 2025 "Outlook for Economic Activity and Prices," underlying CPI inflation will broadly align with the 2% price stability target under the baseline scenario.

In light of these developments in economic activity and prices, the Bank of Japan judges that it is appropriate to moderately adjust the degree of monetary easing to sustainably and stably achieve the 2% price stability target. 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 remain significantly low, if the economic and price outlook outlined in the October 2025 Outlook materializes, the Bank of Japan will continue raising the policy rate and adjusting the degree of monetary accommodation as economic activity and prices improve. With regard to the 2% price stability target, the Bank of Japan will implement monetary policy timely based on changes in economic activity, prices, and financial conditions, aiming for sustainable and stable achievement of the target.

Japan's Economic Activity and Prices: Current Situation and Outlook

The Japanese economy as a whole shows signs of moderate recovery, although some weakness persists. Overseas economies are growing moderately overall, but localized weakness has emerged due to trade and other policies across economies. Exports and industrial production are largely flat on trend, affected by U.S. tariff hikes.

Corporate profits remain broadly high overall, despite downside effects from tariffs in the manufacturing sector, and business sentiment remains relatively favorable. Under these conditions, fixed investment by enterprises shows a moderate upward trend.

Private consumption remains resilient against a background of improving employment and income conditions, but is affected by rising prices. Meanwhile, residential investment has declined.

At the same time, public investment remains generally flat. Financial conditions remain accommodative.

On the price front, as wage increases continue to be passed through to sales prices, and due to factors such as higher food prices including rice, the year-on-year increase in CPI excluding fresh food has recently remained around 3%. Inflation expectations are rising moderately.

Slowing overseas growth—driven by trade and other policies across economies—and its transmission to the domestic economy via channels such as declining corporate profits mean Japan's economic growth is expected to remain moderate, but supportive factors such as accommodative financial conditions are expected to provide offsetting strength.

Going forward, as overseas economies return to a growth path, Japan's growth rate is expected to pick up. As the impact of rising prices for food items including rice gradually fades and partly due to government measures addressing price increases, the year-on-year rise in CPI excluding fresh food is expected to slow below 2% before the first half of fiscal 2026.

Thereafter, as growth accelerates, labor shortages intensify, and medium- to long-term inflation expectations rise, underlying CPI inflation and the pace of CPI gains excluding fresh food are expected to gradually increase, reaching levels broadly consistent with the price stability target in the latter half of the forecast period of the October 2025 "Outlook for Economic Activity and Prices."

Risks to the outlook include overseas economic and price developments influenced by trade and other policies across economies, corporate wage- and price-setting behavior, and movements in financial and foreign exchange markets. Close attention must be paid to how these risks affect Japan's economic activity and prices.