[Speech]Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting of the Okayama Club

NAKAGAWA Junko
Member of the Policy Board
November 10, 2025

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Introduction

It is my pleasure to have the opportunity to address the members of the Okayama Club today. I would like to begin by talking about the current situation of Japan's economic activity and prices and the outlook, and then talk about the Bank of Japan's conduct of monetary policy. Afterward, I look forward to hearing from you about the situation this region is currently facing, and I would also be grateful to hear your views on the Bank's policies and business operations.

I. Current Situation of and Outlook for Economic Activity and Prices

A. Current Economic Developments in Japan

The Bank judges that Japan's economy has recovered moderately, although some weakness has been seen in part.

1. Corporate sector

Let me start with corporate activity.

Please take a look at Chart 1. The Financial Statements Statistics of Corporations by Industry, Quarterly, for the April-June quarter of 2025 showed that current profits for all industries increased by 0.2 percent year on year, maintaining high levels at around the historical peak (left panel of Chart 1). While the current profits of manufacturers decreased by 11.5 percent year on year, those of nonmanufacturers increased by 6.6 percent, reaching high levels at around the historical peak. The decrease among manufacturers mainly reflects the fact that Japanese automakers have so far responded to U.S. tariff hikes by absorbing a large part of the impact through lowering export prices. Meanwhile, the increase in the current profits of nonmanufacturers reflects solid performance across a wide range of industries, owing to, for example, demand for services -- including inbound tourism -- and progress in passing on costs to selling prices.

A similar pattern is observed in business sentiment (right panel of Chart 1). The Bank's September 2025 Tankan (Short-Term Economic Survey of Enterprises in Japan) showed that the diffusion index (DI) for business conditions has been at a favorable level for all industries; the DI for nonmanufacturing in particular was at a more favorable level. The DI for manufacturing remained on a par with the previous June survey. This is likely attributable to the fact that the agreement in the Japan-U.S. tariff negotiations reached in July has reduced uncertainties in the outlook, and that the additional tariff rates on Japanese exports were set at levels that would not disadvantage Japanese exports vis-à-vis the exports of other economies.

Please turn to Chart 2. Real exports have remained more or less flat as a trend (left panel of Chart 2). Since the beginning of 2025, however, they have seen a front-loading due to the tariff hikes and a subsequent reactionary decline. Data by region indicate that exports to the United States decreased by 8.0 percent for the July-September quarter from the previous quarter due to, for example, the effects on automobile exports from the suspension of production lines at some automakers (middle panel of Chart 2). On the other hand, exports to the NIEs and to ASEAN and some other Asian economies increased, reflecting solid global AI-related demand, in addition to moves firms have taken in view of the possible introduction of U.S. tariffs on semiconductors.

Firms have maintained their appetite for fixed investment, despite the impact of U.S. tariff policy on their business performance and uncertainties regarding the outlook (right panel of Chart 2). Business fixed investment plans in the September 2025 Tankan indicated that the year-on-year rate of increase in investment remained at a relatively high level of 10.3 percent for fiscal 2025 -- marking the same pace of growth as in the September 2024 survey. This reflects investment demand in digital areas -- including AI -- and for labor saving, as well as strong construction demand related to, for example, logistics facilities and urban redevelopment.

2. Household sector

Next, I would like to focus on the household sector.

With regard to the employment and income situation, please look at Chart 3. In nominal terms, employee income -- the total amount of wages earned by all employees -- has continued to show a considerable increase (left panel of Chart 3). Moreover, in recent years, this has been driven more significantly by growth in nominal wages than in the number of employees. In real terms based on the consumer price index (CPI), the year-on-year rate of change in employee income has been at around 0 percent, reflecting CPI inflation. The number of employees has also increased, mainly in the information and communications industry and in the medical, healthcare, and welfare services industry, both of which have faced severe labor shortages. Wage growth has been driven both by the high wage growth rate agreed in the 2025 annual spring labor-management wage negotiations and by an increase in bonus payments on the back of favorable corporate profits.

Private consumption has remained resilient, underpinned by the improvement in the employment and income situation (right panel of Chart 3). That said, consumption of nondurable goods -- such as clothing -- has remained relatively weak, reflecting consumers' increased thriftiness amid a rise in food prices. Services consumption, which had continued on a moderate uptrend, has recently become more or less flat.

B. Current Price Developments in Japan

Let me move on to price developments in Japan. Please refer to Chart 4.

Inflation indicators have continued to see high growth, mainly due to the effects of the rise in rice and other food prices, in a situation where more firms have revised prices to reflect increases in, for example, wages and distribution costs (left panel of Chart 4).

Let us look at the breakdown of the year-on-year rate of change in the CPI excluding fresh food, energy, and the effects of government policies and other factors listed in the note for the right panel of Chart 4. The rate of increase in goods prices accelerated significantly after the COVID-19 pandemic, due mainly to higher commodity and import prices. The rate has once again accelerated since the second half of 2024; this time owing to the effects of the rise in food prices. The rate of increase in general services prices -- which remained barely unchanged for a long time -- has also accelerated, led by recent rises in dining-out prices and mobile phone charges, reflecting the pass-through of utility costs, personnel expenses, and other costs. The rate of change in administered prices has also increased.

Under these circumstances, medium- to long-term inflation expectations have risen moderately on the whole, toward 2 percent. The rise in such expectations over the past few years has been more pronounced than in the past.

II. Outlook for and Risks to Economic Activity and Prices

A. Outlook for Firms' and Households' Economic Activity

Let me now turn to the outlook for the economic activity of firms and households in Japan.

With regard to overseas economies, there is no change in the envisaged main scenario; that is, the economies are projected to experience a slowdown for a while, due to the impact of U.S. tariff hikes, but then see a gradual acceleration in their growth rate and return to a moderate growth path.

Corporate profits in Japan, while remaining at high levels, are likely to remain on a declining trend for the time being, mainly in manufacturing, reflecting the effects of a deterioration in export profitability due to U.S. tariff hikes and of the slowdown in overseas economies. Corporate profits are subsequently expected to return to an improving trend, supported by a rise in exports stemming from the recovery in overseas economies and by an increase in private consumption fueled by growth in real wages.

Although business fixed investment is likely to be supported by moves to clear order backlogs and by brisk labor-saving investment, its growth momentum is projected to slow temporarily against the background of uncertainties regarding trade policies. Thereafter, however, the growth momentum is likely to increase. This is because, with reduced uncertainties regarding their earnings outlook, firms are expected to be able to actively undertake forward-looking investment, such as that for capacity expansion to respond to higher demand. Labor-saving investment, mainly to address labor shortages, will also likely support the growth momentum.

The pace of increase in nominal employee income is projected to decelerate somewhat due to the decline in corporate profits. However, with continuing tight labor market conditions, its growth momentum is likely to increase to some extent thereafter in tandem with the recovery in profits.

Private consumption is highly likely to remain more or less flat; although consumption is likely to be pushed down by elevated food prices and the slower growth in bonuses reflecting a decline in corporate profits, an increase in scheduled cash earnings -- owing to the results of the 2025 annual spring labor-management wage negotiations and hikes in minimum wages -- is expected to provide some support. Thereafter, private consumption is projected to return to a moderate increasing trend, since improvement in real employee income is likely to become pronounced as the pace of price rises moderates.

As for the outlook for prices, the year-on-year rate of increase in the CPI is expected to moderate, as the positive contribution stemming from the rise in rice and other food prices, which has significantly led CPI inflation, dissipates. The Bank deems that the price rises seen thus far can also be attributed to the shift in the behavior of firms more toward raising wages and prices. Careful attention is therefore warranted to how such behavior will develop going forward.

The outlook I have outlined here factors in the projections that, for example, labor productivity will increase by a certain degree due to labor-saving investment and that the terms of trade, which reflect the prices of crude oil and other goods, will head toward improvement.

B. Outlook for Economic Activity and Prices

Next, I would like to touch on the price forecasts of the majority of the Policy Board members, decided at the October 2025 Monetary Policy Meeting (MPM) (Chart 5).

In terms of the median of the Policy Board members' forecasts, the real GDP growth rate is projected to be 0.7 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal 2027. Comparing these with the projections presented in the previous Outlook for Economic Activity and Prices (Outlook Report), the projected growth rates are more or less unchanged.

The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027, also in terms of the median of the forecasts. The projected rates of increase are likewise more or less unchanged from those presented in the previous report.

The high CPI growth for fiscal 2025 is due to the factors that I explained earlier (Chart 4). The year-on-year rate of increase in the CPI is likely to decelerate temporarily as inflationary pressures wane over time. However, it is likely that the mechanism by which wages and prices rise moderately in interaction with each other will be maintained. Thereafter, the rate of increase in the CPI is expected to accelerate gradually, alongside the rise in medium- to long-term inflation expectations, since it is projected that a sense of labor shortage will grow more acute as the economic growth rate rises.

C. Risks to Economic Activity and Prices

There remain high uncertainties regarding this outlook for economic activity and prices. I will describe three risks that I am paying attention to.

The first concerns the outlook for the U.S. economy. In recent years, U.S. economic growth has been driven by private consumption and business fixed investment by major IT firms, both of which were mainly supported by high stock prices (left panel of Chart 6). Factors such as corporate dynamism, or the increased entry and exit of firms, the shift of labor to higher-productivity sectors, and the rising number of immigrants have also contributed to economic growth. While consumer prices have shown a moderate rise recently, the impact of tariff hikes on these prices seems to be limited so far (middle panel of Chart 6). It is possible that this impact will become more pronounced in prices and economic activity, and that significant workforce reductions in the government sector as well as a decrease in labor supply due to immigration policy will exert downward pressure on economic growth (right panel of Chart 6). Moreover, attention should be paid to the possibility of considerable adjustments in asset prices and a significant deceleration in the U.S. economy if growth expectations for AI-related investment, which has driven economic growth to date, are adjusted.

The second risk concerns the impact of trade and other policies in each jurisdiction. The very recent U.S.-China summit, for example, is viewed as having made positive progress; as China leverages its technological capabilities and competitiveness to expand exports to countries other than the United States, this could depress corporate profits in those countries, exert downward pressure on the global economy, and ultimately affect Japan's economy. On the other hand, if countries around the world implement expansionary fiscal policies in response to the outcome of tariff negotiations and tariff policies, global economic growth could turn out to be stronger than expected.

The third risk concerns the wage- and price-setting behavior of Japanese firms, as well as its impact on economic activity and prices in Japan. On the one hand, although Japanese firms are likely still in the process of revising prices in response to past price rises, their behavior has been shifting more toward raising wages and prices in the context of economic and price developments so far. With growing expectations that labor market conditions in Japan will remain tight, wage hikes and the pass-through of higher wages to selling prices could both become stronger than projected. The resultant price rises could then affect household sentiment and inflation expectations. On the other hand, if firms find it difficult to pass on costs to selling prices, mainly due to weakened demand, their profits could face downward pressure. In response, they might lean more strongly toward cost-cutting, which could, in turn, weaken moves to reflect price rises in wages.

III. The Bank's Conduct of Monetary Policy

Thus far, the Bank has maintained accommodative financial conditions to firmly support economic activity and has adjusted the policy interest rate with a view to achieving the price stability target of 2 percent in a sustainable and stable manner. At present, based on its outlook for Japan's economic activity and prices, the Bank is conducting money market operations in line with the guideline calling for it to encourage the uncollateralized overnight call rate -- its policy interest rate -- to remain at the target level of "around 0.5 percent."

The Bank has also proceeded with efforts to reduce the size of its balance sheet. Since summer 2024, it has been reducing its Japanese government bond (JGB) purchases gradually, so that it can improve the functioning of the JGB markets in a manner that supports stability in the JGB markets, based on the principle that long-term interest rates are to be formed in financial markets (Chart 7). At the June 2025 MPM, the Bank decided on a new plan for the reduction of its monthly outright purchases of JGBs, so that the purchase amount will be about 2 trillion yen in the January-March quarter of 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar quarter until the January-March quarter of 2026, and by about 200 billion yen each calendar quarter from the April-June quarter of 2026. The Bank also decided at this meeting to discuss a guideline for its JGB purchases from April 2027 at the June 2026 MPM and announce the results. At the September 2025 MPM, it decided to sell exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), at a respective pace of about 330 billion yen and about 5 billion yen per year on a book value basis, in an effort to avoid inducing destabilizing effects on the financial markets as much as possible (Chart 8).

With regard to the future conduct of monetary policy, given the current level of real interest rates shown in Chart 9, if its outlook for economic activity and prices is realized, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation in response to improvement in economic and price developments.

Considering that high uncertainties remain regarding the impact of trade and other policies in each jurisdiction, the Bank will make monetary policy decisions as appropriate by continuing to carefully assess data and information that becomes available.

Thank you.