–BOJ Governor Ueda: Policy Rate at 0.75% After Latest 25-Bp Hike Still ‘Slightly Below’ Estimated Neutral Rate
By Max Sato
(MaceNews) – Japanese government policymakers are holding on to their conviction that the economy will stay on a modest recovery track as the latest trade data showed a rebound in exports to the key U.S. market despite the drag from stiff import duties on autos and metals.
In its monthly report for December released Friday by the Cabinet Office, the government maintained its overall assessment, saying the economy is “recovering at a moderate pace, although the effects of the U.S. trade policy are seen mainly in the auto industry.” The official assessment was last upgraded in August 2024, following a downgrade in February that year.
The report came on the heels of the Bank of Japan’s well-communicated move to raise interest rates and its repeated pledge to continue raising rates as part of its normalization process after decade-long large-scale monetary easing that began in 2012 under the then Prime Minister Shinzo Abe’s reflationary program.
The BOJ’s nine-member board, as widely expected, decided unanimously to raise the target for the overnight interest rate by 25 basis points (0.25%age point) to a 30-year high of 0.75%, effective Monday, pointing to lingering but reduced uncertainties over U.S. trade rows and growing expectations that firms will continue raising wages into fiscal 2026 staring in April.
The bank repeated its mantra that it will continue raising rates if growth and inflation evolve in line with its medium-term outlook but it is still in the process of normalizing its monetary policy stance from years of keeping short-term rates near zero percent.
BOJ Governor Kazuo Ueda told a news conference that the board will discuss the need to raise rates further, taking “one meeting at a time” and its policy decisions will be ‘data- and information-dependent.” After today’s action, the short-term rate at 0.75% is “still slightly below the lower end of the estimated neutral rate,” he said, referring to the evasive measure often described as a moving target that is neither too stimulative nor too restrictive to economic activity.
The board stressed that real interest rates remain “significantly negative” after the rate hike, and thus accommodative monetary conditions will continue and support economic activities.
The bank said in a statement that it took action at this point, judging from anecdotal evidence that prices and wage are “highly likely to rise moderately together” in a positive cycle that it has been pushing to bring about by providing super-low borrowing costs for households and businesses. Firms are “highly likely” to continue raising wages next year and the risk of this move faltering seems to be low, the bank noted.
It is the bank’s first rate hike since January, when it lifted the policy rate by 25 basis points to 0.5% in an 8 to 1 vote amid increasing signs that major firms would maintain substantial wage hikes into fiscal 2025. It is also the fourth increase during the current normalization process that began in March 2024 with its first rate hike in 17 years and an end to the seven-year-old yield curve control framework.
Days before the Dec. 18-19 meeting, Governor Ueda said the uncertainty over the protectionist U.S. trade policy had eased and that he was looking for early signs that many firms plan to continue raising wages at a solid pace into fiscal 2026.
Three days before the meeting, the bank released the results of a quick survey that showed a majority of companies plan to maintain the existing relatively high pace of wage hikes into fiscal 2026 starting in April in order to address widespread labor shortages. Combined with improving business confidence found in the December quarter Tankan survey issued by the bank also on Monday, the BOJ gained sufficient evidence to justify an interest rate hike on Friday, which officials have repeatedly said would be an adjustment of super-low rate to more normal levels and thus would not choke off economic activity.
The board will update their growth and inflation projections in its quarterly Outlook Report due after the Jan. 22-23 meeting. It is likely to leave their forecasts little changed from the October outlook: Tepid GDP growth of 0.7% for both fiscal 2025 and 2026 and 1.0% for fiscal 2027; core CPI (excluding fresh food) 2.7% in fiscal 2025, 1.8% in fiscal 2026 and 2.0% in fiscal 2027.
Data released earlier in the day showed that Japan’s consumer inflation was slightly easier to stable at around 3.0% on the year in November, staying well above the BOJ’s 2% price stability target in the long run.
The government’s monthly economic report also followed an agreement on further lifting the taxable income reached between Prime Minister Sanae Takaichi, who leads the conservative Liberal Democratic Party, and Yuichiro Tamaki, the head of the opposition Democratic Party for the People. Tamaki and his conservative party hold the key to whether the minority LDP government could win parliamentary approval of budget and other important bills.
The accord set the stage for raising the taxable annual income threshold to Y1.78 million from Y1.60 million, which was pushed up in the current fiscal year from Y1.03 million. If approved in the Diet and incorporate into the fiscal 2026 budget and tax code updates, this measure will support low-income households and help stop the spouses of their main income earners from trimming working hours for fear of losing family deductions. The parties also agreed to provide higher basic exemptions to people making Y6.65 million or less in an effort to support middle-income groups.
In its near-term outlook, the government repeated its recent statement, saying, “The improvement in the employment and income conditions and the effects of various (fiscal) policies are expected to support a moderate recovery while the impact of the U.S. trade policy needs a close watch.”
“In addition, the effects of continued price increases on private consumption through a downturn in consumer sentiment are also downside risks to the Japanese economy,” it warned. The government also repeated the need to keep a close watch on “fluctuations in the financial and capital markets.”
As for overseas economies, the government maintained its overall assessment after having downgraded its view for the first time in 10 months in May at the height of global trade uncertainty. “The world economy continues to show gradual recovery while it is pausing in some regions, but there remains uncertainty after the United States raised tariffs,” it said.
The U.S. economy is “expanding moderately” while data release was limited in the aftermath of the government shutdown while the eurozone is “showing signs of a pickup.”
Tokyo continues to view the Chinese economy as “pausing” even though there is an increase in supply thanks to the effects of policy measures.
Key points from the monthly report:
The government maintained its assessment of private consumption that accounts for about 55% of the GDP, saying that it is “showing signs of a pickup.”
Japan’s real household spending unexpectedly posted its first year-on-year drop in six months in October, down a sharp 3.0% (consensus +1.6%), hit by a plunge in purchases of automobiles (-0.86 point contribution) after recent gains. The overall spending slump followed increases of 1.8% in September, 2.3% in August and a recent peak of a 4.7% jump in May.
Among other factors, consumers have been shedding expenditures on food and beverages (-0.34 point) amid sticky inflation and falling real wages. The decline in October was also led by lower mobile communications fees and hotel charges (-0.57 point contribution) as well as a volatile factor of home maintenance and repair (-0.58 point), which marked the fourth y/y drop in a row.
The government continues to term industrial production as “flat.”
In the latest data to be released on Dec. 26, Japan’s industrial production is projected to slip back 1.3% on the month in November for a sixth decline this year, taking a breather after having climbed to a nearly two-year high in October and showing some resilience against the headwind of the protectionist U.S. trade policy.
The monthly survey by the Ministry of Economy, Trade and Industry released last month indicated that output dip 2.6% in November before slipping a further 2.0% in December as the drag from high tariffs on autos and metals is emerging in the final quarter of 2025.
The government maintained its assessment of exports after downgrading it for the first time in 12 months in its July report, saying they are “largely flat.”
Trade data showed this week that Japan’s export values posted the third straight rise in November, up 6.1% on year, thanks to recovering demand from Europe and Asia as well as a rebound in shipments to the key U.S. market but stiff U.S. import duties continue to dent overall Japanese auto exports. On the bright side, export volumes marked their first rise gain in four months, up 0.5% on year.
Other details:
The government’s assessment of key components of the economy in the monthly economic report:
Private consumption is “showing signs of a pickup” (unchanged; upgraded in September 2025; downgraded in February 2024).
Business investment in equipment and software is “picking up moderately” (unchanged; upgraded in September 2025; downgraded in November 2023).
Housing construction “has a weak undertone” (unchanged; upgraded in August 2024; downgraded in August 2025).
Public investment is “firm” vs. “solid” (the first downgrade in 13 months; upgraded in August 2025; last downgraded in October 2024).
Exports are “largely flat” (unchanged; upgraded in February 2025; downgraded in July 2025).
Imports are “largely flat” (unchanged; upgraded in May 2025; downgraded in November 2025).
Industrial production is “flat” (unchanged; upgraded in May 2024; downgraded in Oct 2024).
Corporate profits are “pausing among some firms in the face of the effects of the U.S. trade policy” (unchanged; upgraded in March 2025; downgraded in August 2025).
Business sentiment is “largely flat” (unchanged; upgraded in December 2023; downgraded in April 2025).
The pace of increase in bankruptcies is “largely flat” (unchanged; upgraded in January 2025; downgraded in January 2023).
Employment conditions are “showing signs of improvement” (unchanged; upgraded in June 2023; downgraded in May 2020).
Domestic corporate goods prices are “rising gradually” (unchanged; last changed in November 2025).
Consumer prices are “rising” (unchanged: last changed in November 2024).