In a unanimous decision at its Monetary Policy Meeting held on March 19, 2025, the Policy Board of the Bank of Japan (BoJ) announced that it would maintain the current policy stance, encouraging the uncollateralized overnight call rate to remain at around 0.5 percent. The announcement, made public on March 21, reflects the central bank’s cautious yet forward-looking approach to navigating Japan’s moderate economic recovery and shifting inflationary pressures.
The decision comes as Japan’s economy shows signs of moderate recovery, though weaknesses persist in certain segments. Overseas economies have also registered moderate growth overall, but Japan’s exports and industrial production remain largely flat. However, corporate profitability continues to improve, and business fixed investment has been following a gradual upward trend. Likewise, Japan’s employment and income conditions have seen moderate gains, supporting a sustained, albeit slow, rebound in private consumption, which continues to expand despite the weight of rising prices and other inflationary factors. In contrast, housing investment remains subdued, and public investment has plateaued.
Financial conditions in the country continue to be accommodative, a policy environment designed to stimulate economic activity and support the ongoing recovery. Inflation trends, however, are gaining prominence in policy discussions. The year-on-year increase in the Consumer Price Index (CPI) for all items excluding fresh food has hovered between 3.0 to 3.5 percent recently. This increase is driven by continued rises in service prices, underpinned by wage growth and the gradual withdrawal of government subsidies aimed at mitigating household energy costs.
While the inflationary effects from the previous surge in import prices are diminishing, underlying CPI inflation is expected to rise gradually. This is in part due to an intensifying virtuous cycle between wages and prices, coupled with a tightening labor market. As the output gap closes and medium- to long-term inflation expectations rise, the BoJ projects underlying CPI inflation to align more closely with its price stability target in the latter half of the projection period from its January 2025 Outlook Report.
Throughout fiscal year 2025, upward pressures on rice prices and the tapering of government anti-inflation measures are expected to contribute positively to inflation readings. These trends, according to the central bank, should support the year-on-year increase in the core CPI, excluding fresh food.
Despite these developments, the BoJ remains vigilant about several risk factors. High levels of uncertainty continue to surround Japan’s economic outlook, particularly due to potential volatility in global trade dynamics, geopolitical tensions, fluctuations in commodity prices, and domestic corporate behavior regarding wage and price adjustments. Additionally, the impact of currency fluctuations on price levels is becoming more pronounced, as firms are now more inclined to adjust wages and prices in response to external pressures.
In light of these uncertainties, the BoJ reiterated the need for careful monitoring of developments in the financial and foreign exchange markets. The central bank emphasized that the ongoing shift in corporate behavior toward wage and price hikes makes exchange rate dynamics a more significant factor in domestic inflation than in previous policy cycles.
With Japan’s economy projected to grow above its potential and inflationary pressures steadily building, the BoJ’s decision to maintain its policy rate at 0.5 percent reflects a strategy that balances support for continued economic recovery with a measured response to evolving inflation expectations.