BoJ's Masu details inflation drivers and interest rate outlook
Bank of Japan Policy Board Member Kazuyuki Masu outlined the key factors shaping Japan's economic activity, prices, and monetary policy in a speech on February 6. He detailed the impact of US tariff policy, persistent inflation drivers, and the implications of real and neutral interest rates.
Tariff policy's muted effect on Japan
Bank of Japan Policy Board Member Kazuyuki Masu noted that the impact of US tariff policy, a global concern since spring 2025, appears to be winding down without significant disruption to Japan's economy.
Despite tariffs of up to 12.5 percent on automobiles, Japanese automakers' performance has been partly supported by yen depreciation.
The US economy shows firm consumption and stable employment, mitigating fears of a global slowdown.
While higher tariffs generally increased US import prices, Japanese and European firms absorbed much of the cost.
Japan's GDP fluctuations are temporary, not tariff-driven.
The Bank's Tankan survey shows business conditions at a positive 17 across all industries, the highest since 2018, and overall consumption is gradually improving, suggesting minimal negative impact from tariffs.
Inflation's persistent drivers
Japan's CPI inflation has recently remained above 2 percent, marking a full transition from deflation.
The Bank's January 2026 Outlook Report, however, projects a deceleration below 2 percent in the first half of 2026, influenced by waning food price effects and government measures.
Masu highlighted demand from inbound tourism and supply shortages, especially labor shortages in logistics, as drivers.
Food prices, particularly rice-related items, remain the most significant factor.
While international commodity prices have largely normalized, Masu stresses monitoring processed food prices, excluding rice, which show a persistent 5-6 percent increase, as a key to future inflation dynamics.
Policy rates at a crossroads
Japan's significantly negative real interest rate underscores an economy still striving for robust growth, despite recent policy adjustments.
The neutral interest rate, a crucial but imprecise reference, highlights the complexity of determining the appropriate policy stance.
Future rate hikes will demand meticulous scrutiny of prices, employment, and financial conditions, indicating a cautious, data-dependent approach ahead.