Japan's economy recovers, BOJ raises policy rate to 0.75 percent
The Bank of Japan's semiannual report for October 2025 to March 2026 shows a moderate economic recovery. The central bank raised its uncollateralized overnight call rate to 0.75 percent at the December Monetary Policy Meeting.
BOJ tightens policy as economy recovers
Japan's economy recovered moderately during the second half of fiscal 2025 (October 2025-March 2026), despite some weakness.
Exports and industrial production remained largely flat, impacted by increased U.S. tariffs.
Corporate profits stayed high, and business fixed investment showed a moderate increasing trend.
Private consumption was resilient, supported by improved employment and income, even with rising prices.
Labor market conditions remained tight.
The year-on-year consumer price index (CPI, all items less fresh food) initially ranged from 2.5-3.0 percent, driven by wage pass-through and rising food prices.
It later declined to below 2 percent due to government energy price measures.
Inflation expectations continued their moderate rise.
At its December Monetary Policy Meeting, the Bank of Japan adjusted its monetary accommodation, raising the uncollateralized overnight call rate from around 0.5 percent to 0.75 percent.
The complementary deposit facility rate was set at 0.75 percent, and the basic loan rate at 1.0 percent.
Global tensions shape market dynamics
Global financial markets saw improved sentiment through February, then turned cautious due to increased Middle East tension.
The uncollateralized overnight call rate rose to around 0.75 percent after the December 2025 Monetary Policy Meeting.
10-year Japanese government bond (JGB) yields fluctuated, rising through mid-January, declining through late February, then rising again in March due to crude oil prices and geopolitical tensions.
The Nikkei 225 Stock Average increased significantly over the October-March period, reaching 51,000-52,000 yen by end-March, despite a March decline from increased risk aversion.
The yen depreciated against both the U.S. dollar (to 159-160) and the euro.
Corporate funding costs increased, with demand rising due to economic recovery.
Private bank lending increased 4.5-5.5 percent year-on-year, supported by accommodative lending attitudes.
The monetary base declined, while the money stock (M2) grew 1.5-2.0 percent.
The Policy Board confirmed its intention to continue raising the policy interest rate and adjust monetary accommodation if the economic and price outlook is realized, given significantly low real interest rates and the 2 percent price stability target.
Normalization path remains complex
The report highlights the BOJ's cautious but determined path towards normalization.
The December rate hike, while modest, signals a clear commitment to exiting ultra-loose policy, even as external factors like tariffs and geopolitical tensions complicate the outlook.
However, the fluctuating inflation and yen depreciation suggest the path ahead remains challenging, requiring continued vigilance from the central bank.